General Trading TerminologyLast Updated: November 15, 2019
The forex market is extremely volatile. It can be traded in either a Long (Buy) or Short (Sell) direction for profit.
Leverage involves borrowing a certain amount of the money needed to invest in something. Without leverage, the profit accrued trading Forex will be insignificant (a fraction of a penny) because the market rates have minuscule fluctuations. In order to fully take advantage of the Forex market, leverage is required and can be obtained via a Forex Brokerage Firm. When you trade through a broker, the broker is taking a small investment to hold as collateral for the trade (Margin). The Broker then allows you to invest and control a much larger amount of money.
A margin is part of your account balance set aside by your broker for each order to cover potential losses. It is essentially collateral to open a trade and keep it open. Reach out to your broker for information on the margin requirements for your account.
If the amount needed to keep the trade open exceeds your available balance, the broker will close out your open trades. The closing of these trades is a margin call.
Balance vs Equity
The Balance is the amount of free cash in your trading account that you can withdraw at will. If you have any trades that are open with a profit or loss, this will be reflected in the equity. Thus, the Equity is the balance, plus or minus any unrealized profits/losses that have been incurred.
Lot Size represents the amount a trader is wagering in reflection to the return on pips.
There are three general lot sizes that outline general investment values.
- A standard lot represents 100,000 units of any currency
- A mini-lot represents 10,000 units of any currency.
- A micro-lot represents 1,000 units of any currency.
A one-pip movement for a standard lot corresponds with a $10 change. For example, if you buy $100,000 against the Japanese yen at a rate of ¥110.00 and the exchange rate moves to ¥110.50, which is a 50 pip movement, you have made $500. Conversely, if the exchange rate falls 50 pips to ¥109.50 your net profit and loss is minus $500.
Pips are the measurement of change in the rate of an instrument that can be directly converted to the currency value.
Example: The EUR/USD changes from 1.23441 to 1.23541 the change has a rate value of 0.00100 to convert this to one is to count that last value in the market rate as a fraction of a pip and the next decimal places represent full pip values.
The pip value of a change in the rate of 0.00100 = 10.0 Pips. The Pips value of a change in rate for a currency with only 3 decimal places like 0.234 represents 23.4 Pips.
- A spread is the difference between the bid and the ask price.
- With SmartTrader the spread is displayed in the trading panel.
- With SmartTrader the spread is also available on the trading widget.
- The spread is directly reporting from the default broker connected to SmartTrader.
A 2009 rule implemented by the U.S. forex industry’s self-regulatory organization, the National Futures Association (NFA), regarding forex trading by U.S. regulated forex companies. It prohibits hedging by requiring multiple positions held in the same currency pair to be offset on a first-in, first-out (FIFO) basis.
First in, first out (FIFO) is a management method in which the assets produced or acquired first are sold, used or disposed of first and may be used by an individual or a corporation. For taxation purposes, FIFO assumes that the assets that are remaining in inventory are matched to the assets that are most recently purchased or produced.
A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in related trade.
Hedging in the forex market is displayed when a trader has a buy order and a sell order on the same currency pair.
Hedging is not permitted with some regions and your broker will permit or deny hedging depending on regulations of your country. For more details about your account's abilities please contact your broker for more information.
The Open in trading represents the starting price that was first reported during a specific timeframe.
Example: The first tick of the 10 PM candle came in at a rate of 1.6647. The open price of this candle is 1.6647.
The Close in trading represents the end price that was last reported during a specific timeframe.
Example: On a 1 hour timeframe, the candle closed at 10:59 PM with the market price of 1.6347. The close price for this candle is 1.6347.
A high in trading represents the highest market rate during the selected time.
Example: During a one hour candle the highest value was reported 1.6347, so the high for this 1 hour candle is currently 1.6347
Low in trading represents the Lowest market rate during the selected time.
Example: During a one hour candle the lowest value was reported 1.6347, so the low for this 1 hour candle is currently 1.6347