How to grow your trading account : How to read a quote and some other basic terms in Forex
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In forex we trade currencies against each other. In order to trade currrencies you need to know how to read a quote. In this post, I will be teaching you how to read a quote and other terms you need to know in forex trading.
What is a quote?
Dailyfx defines a quote as the price of a currency with respect to another currency. it is a way of comparing one currency to the other. A quote always consist of two currencies as earlier said. one currency is called the base currency while the other is called quote currency.
for example;
EUR/USD
In the above example, the euro is the base currency and the united state dollars is the quote currency. This means that if you are buying this pair, you are buying the euro with a certain amount of dollars. In layman's term you are selling your dollars to buy euro. it also means that if you are selling the pair, you are selling the euro to buy United states dollars for a certain price. In essence the base currency is the basis for any trade. It is the ground for comparison with the quote currency.
GBP/USD=1.3134
The above example shows the value of the the United states Dollars(quote currency) with respect to the Great British Pound(base currency). Interpreting this quote means it will cost you 1.3134 dollars to get one great british pound.
This should be clear by now. However in forex we don't buy one unit of a currency and that brings us to the concept of lots. When you go to a supermarket, there are some things you cant by singly, you have to buy them in packs(lots). For example if you want to buy eggs, you have to buy a crate which is about 30 pieces. In forex we buy currencies in lots. This lots can be compared to packs of cards. This lots can be standard, mini and micro lots. I hope this analogy makes sense.
1 lot = 100000 units 1 micro lot= 10000 unit 1 mini lot = 1000 unit
This means if we are buying one lot of the example I gave above, we will be needing $131,340 to buy 1 lot size(100,000 units) of GBP. However not everyone can afford this amount hence the concept of margin trading. Margin trading allows you to trade large positions with a small amount of money. So if you have your trading account set at 3% margin. With margin trading it means you need to 3% of $131,340 to have that position open which is about $3940.
You might be wondering how a small trader with a small capital like hundred dollars trade?
Well thank God for brokers that allow some other smaller lots like nano lot size and some brokers even go as far as allowing cent accounts. These small accounts allow you to trade with as small as ten dollars. this accounts to me are for testing the waters.
Some other terms you need to know in forex
- Bid: bid refers to the highest price a market participant is willing to buy what you are willing to sell. You definitely want to sell to the highest bidder.
- Ask: this refers to the lowest price a market participant is willing to sell the pair you are willing to buy. it is just natural to buy the cheapest stuff in the market.
- Spread: This is the difference in price between the bid and ask.This spread usually goes to the brokers.
- Pip: Babypips defines pips as the unit of measurement to express the change in value between two currencies. It is an acronym that means Percentage in price.
- Pipette: A pipette is a smaller fraction of a pip.
For example;
if GBP/USD moves from 1.1314 to 1.1315, it has increased by a pip.
Most values attached to a currency pair have 4 digits after the decimal point except the Japanese pairs.Any change in movement within the four digits after the decimal points for normal pairs are regarded as pip movement. Anything outside that is a pipette movement.
Fpr example;
GBP/USD 1.13145
5 in the above example is the pipette
