Preparation phase is a key instrument in profitable Forex and CFD investment as well as in any type of business activity. Understanding and familiarizing yourself with terminology is valuable for any trader.
Quote refers to an indicative market price of the quoted currency. Forex quotes display current exchange rates. A quote will always be for a currency pair, for example EUR/USD, AUD/JPY or USD/JPY. The first currency in the pair is the quoted currency, while the second currency is referred to as the counterpart.
A currency pair is usually quoted to a 1/10,000 degree of precision (i.e. until the 4th digit right of the decimal point); except for Japanese yen pairs, where quotes are usually made to 1/100 degree of precision (i.e. to the second digit right of the decimal point).
A quote will always be provided in a form of two figures. The first figure is always the selling price (bid), while the second is the buying price (ask).
Bid or selling price is the exchange rate at which a currency is offered for sale. Ask or buying price is the exchange rate at which a currency can be bought.
In the example above the EUR/USD pair is quoted at 1.5034/1.5037. In other words, the quote for the EUR/USD pair is 1.5034/1.5037, where 1.5034 is the Bid price and 1.5037 is the Ask price. Meaning if you wish to sell the quoted currency (in this case the euro), then you would receive 1.5034 US dollars per 1 euro. On the other hand, if you are buying the quoted currency (euros for US dollars), you need to pay 1.5037 dollars per 1 euro.
A lot is the standard unit size of a transaction (the smallest trade size available). It represents the minimum quantity which can be traded in any given instrument.
This is the smallest value in a currency quote. It can be different for different currencies. For most currency pairs a pip is the 1/10,000 (0.0001) fraction of the quoted currency. However, in Japanese yen pairs, a pip refers to a 1/100 (0.01) fraction of the quoted currency.
Trade profits can be expressed in pips. For example, you bought the EUR/USD at an exchange rate of 1.2915 and sold it at an exchange rate of 1.2936. In this case you made a 21 pip profit.
The pip value can be either variable or fixed, depending on the currency pair it refers to and the base currency on your account. The pip value also depends upon the amount traded.
The simplest way to calculate the pip value is to divide 1 pip by the exchange rate and multiply it by the lot size. This gives you the pip value in terms of the quoted currency.
If the base currency of your account is other than the quoted one, then simply multiply the given number by the applicable exchange rate.
For example: What is the pip value of a trade in GBP/JPY with a price of 128.92? The pip value of 1 standard lot (5,000) of GBP/JPY which is traded at 128.92 is calculated as:
0,01/128.92 = 0,00007756 GBP
0,00007756 x 5000=0,387 GBP
The base currency of your account is USD. If the exchange rate for GBP/USD is 2.0612, then the pip value for 1 standard lot in terms of the account’s base currency is: 0.387x 2.0612 = $0.80.
Spread refers to the difference between the bid price and the ask price. For example: If the quote for the EUR/USD pair is 1.5034/1.5037 (in other words the bid price is 1.5034 and the ask price is 1.5037), then the spread for the EUR/USD is 3 pips. Low spreads ensure that traders can get in and out of their trades at very low slippage.
Margin is the amount of funds required to open or maintain a position. It is usually expressed as a percentage of the open position. If you have a margin requirement of 0.5%, this means that in order to hold a position of 100,000 EUR/USD, an equity level of 500 euros or more must be maintained.
Leverage refers to an opportunity to use borrowed capital for the increase of potential return. Trading on leveraged capital means that you can trade amounts significantly higher than the balance of your funds, which only serves as the margin. High leverage can significantly increase both the potential return and potential losses. The leverage is specified as a ratio, such as 200:1. This means that the trader can trade amounts 200 times higher than the sum in his or her margin account. If the trader has $1,000 in his account, it means that he or she can open trades worth $200,000.
In a sense, interest is the price of money. Interest is the amount paid on loans and received on deposits.
A trader going long expects the price to go up when buying a currency pair or a CFD.
A trader going short expects the price to go down when selling a currency pair or a CFD.
The date on which counterparts of a financial transaction agree to settle their respective obligations, i.e., exchanging payments.
Rollover refers to a process where the settlement of a deal is rolled forward to another value date with a certain interest charged.
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