Forex has its own language , that is, special terminology. The first currency in our case, the euro is the base currency , and the second the US dollar is the quote currency. As you see, we use short forms for currencies: It is the rate at which you exchange one currency for another.
The exchange rate shows you how much of the quote currency you need if you want to buy 1 unit of the base currency.
This means that 1 euro the base currency is equal to 1. Now take a quick peek at how the euro is doing against the Japanese yen: The exchange rate may change in 2 days or 1 week, though. It may even stabilize for a while. The when is a question that nobody can answer precisely. Because currency rates change all the time, and you want to know when to buy one currency and when to sell another to make a profitable deal. It is a market price that always consists of 2 figures: Also known as the offer price , the ask price is the price visible on the right-hand side of a quote.
This is the price at which you can buy the base currency. Bid is always lower than ask. And the difference between bid and ask is the spread. It is the difference in pips between the ask price and the bid price. The spread represents the brokerage service costs and replaces transaction fees.
There are fixed spreads and variable spreads. Fixed spreads maintain the same number of pips between the ask and bid price, and are not affected by market changes. Variable spreads fluctuate i. It is the currency you choose when you open a trading account with XM.
All your profits and losses will be converted into that particular currency. At XM you can open any kind of trading account you prefer with many base currency options: Are you a visual type?
As you see, the pip is the last decimal point. All currency pairs have 4 decimal points — the Japanese yen is the odd one out. Pairs that include JPY only have 2 decimal points e. It is an extra decimal place in the exchange rate. In the case of non-JPY pairs, we have 1. We call the last decimal place in such pricing a pip fraction or tenth pip.
Forex is traded in amounts called lots. The pip value shows how much 1 pip is worth. The pip value changes in parallel with market movements. So it is good to keep an eye on the currency pair s you are trading and how the market changes. Margin is the minimum amount of funds, expressed as a percentage, that you will need if you want to open a position and keep your positions open.
And so, in order to buy 1 standard lot i. Basically, margin trading involves a loan from the forex broker to the trader. Practically speaking, what you do is speculate on the exchange rate. In other words, you estimate how the exchange rate will move, and you make a contract-based agreement with your broker that he will pay you, or you will pay him, depending on whether your estimation has proved to be correct or wrong i.
Instead, you will have to put down a deposit that we call margin. This is why margin trading is trading with borrowed capital. In other words, you can trade with a loan from your broker, and that loan amount depends on the amount you initially deposited. Margin trading has another big advantage: As you can see in our example, your initial deposit serves as a guarantee for the leveraged amount of , USD. This mechanism ensures the broker against any potential losses.
Moreover, you as a trader are not using the deposit as payment, or to purchase currency units. Your broker needs a so-called good-faith deposit from you. Strictly speaking, through leverage the forex broker lends you money so that you can trade bigger lots:. Leverage depends on the broker and its flexibility.
At the same time, lLeverage varies: This sounds great, but how does it actually work? I open a trading account and I get a loan from my broker as simply as that? Firstly, it depends on what type of account you open, what the leverage for that particular account type is, and how much leverage you need.
Leverage can be used to maximize gains — but also losses, if you are too greedy. You open a trading account that has a leverage of 1: The profits that you make by trading will be added to your account balance — or, if there are losses, they will be deducted. Leverage increases your buying power and can multiply both your gains and losses. Always choose a broker that offers no negative balance protection , and so your losses will never exceed your capital.
This means that if your loss reaches USD 5,, your positions will be closed automatically so that you will not end up owing money to your broker. It is the total amount of money in your trading account, including your profit and losses. This means that if your equity is USD 13, and your open positions require USD 2, margin used margin , you are left with USD 11, free margin available to open new positions.
Margin calls are a major part of risk management: The quoted rate is 1. In the meantime the price has moved to 1.
Now you are selling in order to close your trade. You must take the bid price of 1. What do you see? The difference between 1.
This equals 20 pips. As you learnt it before, you use the ask price when you buy a currency, and the bid price when you sell a currency. When you enter a short position, you sell a base currency. If you enter a long buy position and the base currency rate has gone up, you want to get your profit. To do so, you must close the position. You want to go short place a sell order on this currency pair if the price reaches 1. This order is called limit order.
So your order is placed when the price reaches the limit of 1. A buy limit order order is always set below the current price whereas a sell limit order is always set above the current price.
It is an order that you give to buy above the current price or an order to sell below the current price when you think the price will continue in the same direction. It is the opposite of a limit order. You want to go long i. This order is called stop-entry order.
It is an order to close your trade as soon as it reaches a certain level of loss. With this strategy, you can minimize your loss and avoid losing all your capital.
You can make stop-loss orders with automated trading software. When you place an order, it will be sent to your broker, who decides whether to fill it, reject it, or re-quote it. Once your order is filled, you will receive a confirmation from your broker. It is crucial to have your orders executed quickly.
If there is a delay in filling your order, it can cause you losses. That is why your forex broker should be able to execute orders in less than 1 second. A re-quote is an unfair execution method used by some brokers. Now you have taken your first baby steps and learned to toddle around in the world of forex. And most importantly, you now know the basic forex terminology.
Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.More...