21 Oct

Forex Trading Terminologies

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PIP: Pip stands for percentage in points and is the smallest increment of trade in FX. In the FX market, prices are quoted to the fourth decimal point most of the currency pairs like EURUSD, USDCAD, NZDUSD and etc.

Second decimal point like all JPY pairs Four decimal Pairs PIP calculations: For example, If EUR/USD moves from 1.3500 to 1.3501, that the 0.0001 EUR rise in value is ONE pip. A pip is usually the fourth decimal place of the quotation.

Two decimal pairs PIP calculation: For example, a USD/JPY move from 100.00 to 100.01, that’s 0.01USD rise in value is ONE pip. A pip is usually the second decimal place of the quotation The exchange rate will be expressed as a ratio EUR/USD = 1.0920 will be written as 1EUR equal to 1.0920 USD.

Spread: The spread is the difference between asking price and bid price. In fx market, there are two different prices for a currency pair at any time. There are the bid price and the ask price. For example when you made a long trade or buy trade, you would pay the bid price on the pair. When you sell or close that trade, you would close at the ask price.

Lot size or volume: A lot represents the standardized quantity of a financial instrument as set out by an exchange or similar regulatory body. In Forex lot is represented by standard lot (1.0), mini lot (0.10) and micro lots (0.01).

Lot Number of units or quantity:

Micro lot (0.01) = 1000 Number of units or quantity
Mini lot (0.1) = 10,000 Number of units or quantity
Standard lot (1.0) = 1,00,000 Number of units or quantity
 
Leverage: Leverage allows a trader to trade without putting up the full amount. Alternatively a margin amount is required. For example 1:100 leverage, also known as 1 % margin required, means 1000$ of equity is required to purchase an order worth 100000$. 1:500 leverage means 200$ is required to purchase an order worth 1, 00,000$.
Leverage increases both downside and upside to risk as the account is now that much more sensitive to price movements.
 
Profit or loss: Profit or loss based on market moves against you of favorer of you.
Actual Profit or loss = how many pips has moved * lot size
 
Example: Pip movement = 10 pips
One pip equal to = 0.0001 => 10 pip = 0.0010
Lot size = 0.1 (10,000 $)
Profit or loss = 0.0010 *10,000
Profit or loss = 10 $ (if the market moves favor of you your profit 10$, other hand,     market moves against of you your profit -10 $, it means loss 10$)
 
 
Balance: When you have not any open trade, the balance is that the quantity of the money you have got in your account, for example, after you have a deposit 10000$ account and also you have not any open trade, your account balance or your money is 10000$
 
Equity: Equity is your account balance plus the floating profit or losses of your open trades. If you have not any open trades your equity equals to your balance
 
Equity = Balance + Floating profit / loss
 
For example, your balance = 10000 $
Your open trade profit = 500 $
Equity= 10000 + 500 = 10500 $
(If open trade loss = 500 $
Equity = 10000 – 500 =9500 $)
 
Margin: Margin is that the amount of the money that traders in trade or position, margin is calculate supported the leverage, first consider leverage is 1:1 
 
For example, your account size is 10,000 $, you would like to buy 1000 Euro against the dollar (USD). What quantity US dollar you have got to pay to buy 1,000 Euro?
 
Current EUR/USD price rate is 1.3500. It means one Euro equals to 1.3500 US dollars, therefore you have to pay 1.3500 * 1,000 = 1350 $
If you use 1:100 leverage means you have to pay 1350/100 = just 13.5 $ only
 
Free Margin: Free margin is equals to difference between Equity and margin
 
For example, your equity = 10500 $
Your margin = 1350 $
Free margin = 10500 – 1350 => 9150 $
Margin level:Margin level is the ration of equity to margin
Margin level =) equity/margin) * 100
 
Margin level is incredibly vital. Brokers use it to see whether or not the traders will take any new positions or not. Completely different brokers have different limits for the margin level; however, this limit is sometimes 100% with most of the brokers. This limit is termed margin call Level. 100% margin call level means that if your account margin level reaches 100%, you'll be able to still close your open positions; however you cannot take any new position. Indeed, 100% demand level happens once your account equity equals the marginal. It happens after you have been losing position and also the market keeps on going against you and once your account equity equals the margin, you may not be ready to take any position.
 
Let’s say you have got a $5,000 account and you have a losing position with $500 margin. If your position goes against you and it goes for a loss of -$4500, then the equity you have $500 ($5,000 – $4,500), that equals the marginal. Thus the margin level is going to be 100%. If the margin level reaches 100%, you may not be ready to take any new position, unless the market turns for your favor and your equity becomes bigger than the margin.
 
If the market keeps on going against you, the broker can need to close your losing positions. Completely different brokers have different limits for this too. This limit is named Stop out Level. If your margin level reaches 5%, our system starts closing you’re losing positions automatically. It starts from the largest losing position. Usually, closing one negative profit position can take the margin level more than 5%, as a result of it can release the margin of that position and then the whole margin can go lower and therefore the equity can go higher and thus the margin level will go higher. The system takes the margin level more than 5% by closing the largest losing position initially. However, if you’re different losing positions stick with it losing and therefore the margin level reaches five-hitter once more, the system can shut another losing position.
 
Why the broker closes your positions once the margin level reaches the Stop out Level?
The reason is that the broker can’t allow you to lose over the money you have deposited in your account. The market will stick with it goes against you forever and therefore the broker can’t pay for this continuous loss. It is sensible, doesn’t it?
 
For example,
Equity= $ 4500
Margin = $ 500
Margin level = (Equity/Margin) *100
= (4500/500)*100
=900%
 
Stop loss: This order is used to reduce your losses if the currency pair price starts to move in an unprofitable direction. For instance, if you bought a currency and it start to fall; your stop loss would keep you from losing more than you wanted to by selling. Other hand, if you sold-out a currency and it start to get up, your stop loss would keep you from losing more than you wanted to by buying automatically.
 
 
For your buy entry you can set a stop loss below the current market level, also your sell entry you can set a stop loss above the current market level.
 
Take profit: This order is used to gain profits if the currency price begins to move in a profitable direction. Market goes downside to the Take Profit is that sometimes you get in on the bottom floor of a particularly profitable trend that continues long when you have got excited and you accidentally deprive yourself of an excellent additional profitable trade.
 
For your buy entry you can set take profit above the current market level, also for your sell entry you can take profit below the current market level.
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Risk warning: Trading foreign exchange (Forex Trading) and contracts for differences (CFDs) on margin carries a high level of risk, and may not be suitable for all investors. There is a possibility that you may sustain a loss equal to or greater than your entire investment. Therefore, you should not invest or risk money that you cannot afford to lose. Please ensure you fully understand the risk involved before trading, and if necessary seek independent advice.

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