Risk/reward ratio: An estimated measure of the profit potential per amount risked.For example, if the EUR/USD exchange rate is 1.1700, it would cost $1.17 to buy 1 euro. Exchange rate: The amount of the counter currency required in exchange for one unit of the base currency in a foreign exchange transaction.The maximum leverage ratio varies considerably among online brokers - ranging from 20:1 to 1,000:1 or more - and can depend on what jurisdiction you reside in. Leverage/margin: Leverage is the size of a trading position you can control with a given amount of “margin” or money placed on deposit in your trading account to be held by your broker as collateral against trading losses.The size of a pip for most currency pairs is 0.0001. Pip: An acronym for “point in percentage” that represents the smallest change in a currency pair’s exchange rate.Long positions are taken when you think the pair’s exchange rate will rise, while short positions are taken when you think the exchange rate will fall. Long/short: A position in which one has net purchased/sold the base currency in a currency pair.Forex traders take positions to speculate on exchange rate movements. Position: The net amount of a currency pair that provides exposure to movements in that pair’s exchange rate.Forex derivatives are popular because they can combine the values of two or more currencies and trade shares based on that value. Derivative: A financial tool that derives its value from another asset, like a currency.Examples include: New Zealand, Russia, Canada, Australia, etc. Commodity currencies: Currencies from countries where the economy relies heavily on commodity exports.This method of investing helps you invest in futures without owning the product. If you sold short on that position, you would pay $1. In essence, if you used a CFD to buy currency for $10 and sold the position for $11, you would get $1. CFD: A Contract for Difference is a tool disallowed in the U.S.An example of a currency pair is EUR/USD that represents the EU’s euro quoted versus the U.S. Currency pair: Two currencies in which the first, known as the base currency, is quoted in terms of the second, known as the counter currency.
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