Knowing 5 Basic Terms in Forex Trading, Traders Must Know!

Apart from investing, trading is another way to make a profit. Trading is a buying and selling activity in the financial market, one of which is popular besides stock market instruments, namely foreign exchange (forex).

Forex trading can be an option that should be considered, because globally, the volume of forex transactions itself is larger when compared to stock trading.

This is motivated by a variety of transaction needs that must be carried out by many people, ranging from debt payments, exports, imports, and foreign travel.

Before trading, here are some basic terms that you should know, as quoted from Kompas.com.

1. Type of transaction

In forex trading, there are several types of forex transactions, such as spot forex, forward transactions, swap transactions, options transactions, and futures transactions.

For futures transactions, currently many brokers provide futures transactions for forex trading, namely futures contracts that require traders to buy or sell a certain number of underlying assets at a certain price and time in the future.

The price at a certain position is referred to as the futures price, while the price of the underlying asset at the delivery date is referred to as the settlement price.

The date in the future is called the delivery date or final settlement date.

2. Leverage

Leverage is a loan facility provided by a broker or broker to a trader, whose function is to increase the purchasing power or capital of a trader in a certain proportion.

The amount of leverage itself varies, starting from 1:20, 1:50, 1:100, 1:1,000, and so on.

For example, if you have a capital of IDR 1 million, if you use the 1:100 leverage facility, you have the ability to buy 100 times more than the capital you have.

This means that you can make foreign exchange transactions up to Rp. 100 million.

3. Margin

Well, to do this leverage, traders usually have to provide a certain amount of money as collateral to make transactions.

For example, if you use the 1:100 leverage facility, you must have a margin of one percent. So, you must provide capital at least one percent of the value of the funds you want to trade when trading forex.

On the other hand, if the trader cannot or fails to provide the minimum amount of funds, then your trading will be in a margin call position, so all open trading positions and accounts will be closed automatically by the system.

4. Lot and pip

The term lot is usually widely used in the stock market and may be familiar if you invest in stocks.

Although the terms used are the same, lots in the stock market and forex trading have different transaction volumes.

If in the stock market one lot is equal to 100 shares of a company, one lot in forex is equal to 100,000 contract sizes.

In addition to lots, there is also the term pip or points, which is the smallest unit of price change in forex which is usually calculated from the four numbers behind the comma.

For example, if the EUR/USD currency pair you are investing in falls from 1.1645 to 1.1635, that means there is a decrease of 10 pips.

5. Price movement trend

Forex trading has high volatility with price movements that fluctuate trends or tend to change quickly.

There are certain terms that describe a trend of price movements to make it easier for traders to make transactions, namely bullish, bearish, and sideways.

Bullish is a trend of price movement that tends to rise or an uptrend, while bearish is the opposite or a downtrend. While sideways is a stable or flat movement trend.

Those are some terms in forex trading that you should know if you are interested in wrestling in foreign currency trading.

Before that, don't forget to make sure you understand all things related to forex, yes, from risks to how it works to avoid losses.