“Foreign exchange is a foreign language to many private investors,” says the FT, and it’s no surprise. Buzzwords abound, with traders gabbling about ‘loonies’ and ‘swissies’ and ‘ticks’ and ‘pips’. But don’t be put off; you need to understand only a few terms to get started.
Forex terms: making deals
Just like share trading, deals are done at a bid (buying) or offer (selling) price. The difference between the two is the ‘spread’, which represents the dealer’s profit. Prices are always given to five figures. So, for example, a bank might quote ‘cable’ (the pound/dollar rate) as 1.9850/1.9855. If you wanted to buy dollars you would simply sell £1,000 ‘spot’ and receive the bid price of $1,985 (1000 x 1.9850).
Forex terms: exchange rates
Since exchange rates usually move by relatively small amounts, changes are quoted in ‘ticks’ or ‘pips’, rather than pounds or dollars. Say the pound/dollar bid rate were to move from 1.9850 to 1.9860. This would be quoted as a movement of ten ticks, or pips. The pound has ‘strengthened’, while the dollar has ‘weakened’, since the original £1,000 buys more dollars – $1,986 – at the new rate.
Forex terms: major currencies
As for the currencies themselves, there are seven major ones. There’s the US dollar, the world’s reserve currency (for now, at least), for which the FX symbol is USD. The other six major currencies are as follows: the euro (EUR); the Japanese yen (JPY); the pound, or sterling (GBP); the Swiss franc, or ‘swissie’ (CHF); the Canadian dollar, or ‘loonie’ (CAD); and the Australian dollar (AUD). All currencies are quoted as pairs, usually in terms of the world’s key trading currency, the US dollar.
When trading, you must remember which way round the rate is being quoted, so that you place the right bet. For example, if you buy USD/CAD, you are betting that the US dollar will strengthen against the Canadian dollar, whereas if you were to buy GBP/USD, you are betting on sterling gaining and the US dollar weakening.
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