Forex trading in the UK attracts a lot of people to become traders because of the high probability to gain profit from just a small capital. Professional traders seem to have it all worked out, but entering the field as a beginner can be a difficult task especially if you are not familiar with the lingo of forex trading. This article will serve as your refresher to help you prepare for your first trade.
Pip stands for “percentage in point” and is the smallest price change that a certain exchange rate can make. This unit of measurement shows how much profit or or loss is gained in a trade or in the exchange rate. Prices of almost all major currency pairs are listed in four decimal places, and a change in number at the last decimal point denotes the smallest change. For example, if the GBP/USD moves from 1.2584 to 1.2585, the 0.0001 rise is considered one pip.
Bid and Ask
Currency prices in forex trading is categorized into two: bid and ask. To avoid confusion, these two prices are always made from the perspective of the dealer, and not the trader. The bid price is the maximum price in a quote currency that a dealer is willing to pay in order to buy the base currency from a trader. Ask price, on the other hand, is the minimum price in quote currency that a dealer will sell the trader who wants to buy the base currency. When written side by side, the ask price is always higher than the bid price.
Let’s say that the GBP/USD has a quote currency of 1.2597/1.2599. The bid price is $1.2597 and the ask price is $1.2599. Therefore, a dealer is willing to pay you $1.2597 to buy a pound from you, and will ask for a price of $1.2599 for a pound.
A spread is the difference between the bid price and the ask price in a currency pair, which also measures the cost of trading. To get this, the bid price is subtracted from the ask price. Using the previous example of GBP/USD having a bid price of $1.2597 and an ask price of $1.2599, the spread is worth $0.0002, which is equivalent to 2 pips.
Any professional trader will advise you not to make your first trade unless you understand what these words mean. Forex trading in the UK or any parts of the world draws a lot of attention due to the fact that your £1,000 can jump to a whopping £10,000, but it’s not always a good day everyday in the market. Gaining a loss without knowing why is an avoidable mistake if you can familiarize yourself with how the market operates.