6 Key Terms You Need to Know Before You Start Forex Trading
|Every trader must learn these terms and ideas before beginning Forex Trading
1. Pip
In Forex trading, a PIP or pip is short for ‘percentage in point’ and is a measure for exchange rate movement. The pip is a unit – a numeric value that ultimately measures profit and loss. A single pip is equal to 0.0001.
Forex traders will often quote the movements, profits or losses in pips. For example, stating something like “I made 30 pips on that last trade” or “the AUD/USD has just gained 30 pips in the last hour”.
MXT Global’s currency prices are displayed to the fifth decimal place (fractional pips) for improved precision. Our spreads can be too small to be seen with only four decimal places.
To find out more about pips, please see the following topics:
• What is a fractional pip?
• How do you calculate the Per Pip Value?
• How is the pip change or movement calculated?
• How do you calculate profit/loss in pips?
2. Spread
A spread is the pip difference between the bid and the ask price of an underlying asset. As it is essentially the cost of making a trade, it is important for Forex traders to know what spreads are. To find the spread we minus the Bid (Sell) Price from the Ask (Buy) Price.
From the example taken from the Trade Terminal below, the AUD/USD is currently priced at 0.93860/0.93865 (Sell/Buy).
Buy Price – Sell Price = Spread
0.93865 – 0.93860 = 0.00005 or 0.5 pips
The MT4 Trade Terminal will show the spread quoted in pips between the two prices. Spreads are always variable and as we source our feeds from as many as 70 different institutions, we can provide lower spreads. To compare the spreads between different currency pairs and other Forex providers, please see here.
3. Leverage
Leverage is the ratio at which defines the loan amount, “margin”, that traders are allowed to use to gain access to larger sums of trading capital. Leverage can heighten both profits and losses and should be used wisely. Due to the nature of leverage, Forex providers like MXT Global have strict leverage restrictions in place to assist traders in minimising risk.
Let’s look at a numerical example:
Say two traders have $5,000 USD and they both wish to use $1,000 on one trade as margin. Trader A has an account leverage of 10: 1 and Trader B has an account leverage of 100:1.
The exposure they both have differs due to the difference of their account leverage ratios.
4. Margins
In Forex trading, a margin is required to trade. A margin can be considered as the minimum collateral or deposit. This margin allows you effectively take a ‘loan’ – access to a larger amount of capital.
How do you calculate the margin per trade?
An account leverage ratio is used to determine how much margin will be required.
Overall Lot Size / Leverage Amount = Margin Required
Example with 2 lots at leverage of 400:1
200,000 / 400 = $500 margin required
A margin call is a notification you will receive when there are not enough funds in your trading account support open trades. Essentially, when your floating losses are greater than the minimum margin required. MXT Global’s margin call level is at 80%.
5. Volume
Looking at the your MT4 terminal, you will see the term ‘Volume’ appear.
Volume in the Order window refers to the volume to buy/sell.
Volume refers to number of lots whereby 1 lot = 100,000 units
Volume in on the Volume bar in the charts refers to the tick volumes. It counts how many times the price has changed in that period.
6. Slippage
When you’re trading, sometimes you’ll notice a slight difference between the price you expect and the execution price (the price when the trade is executed). When this happens, it’s known as slippage. It’s a common thing to experience as a trader and it can work either positively or negatively. The main reasons for slippage are market volatility and execution speeds.
Slippage Example
The price of the AUD/USD was 0.9010. After analysing the market, you speculate that it’s on an upward trend and long a one standard lot trade at the now current price of AUD/USD 0.9050, expecting to execute at the same price of 0.9050.
The market follows the trend but goes past your execution price and up to 0.9060 very quickly – within a second. Because your expected price of 0.9050 is not available in the market, you’re offered the next best available price. For the sake of the example, that price is 0.9045.
In this case, you would experience positive slippage:
0.9050 – 0.9045 = 0.0005, or +5 pips.
On the other hand, let’s say your trade was executed at 0.9055. You would then experience negative slippage:
0.9050 – 0.9055 = 00.0005, or -5 pips.
Related read: Trading Breakouts in Forex
When trading Forex, one can either choose to follow the myriad rules that other traders have put in place or go their own way. The path chosen will depend on several factors, such as experience, technical knowledge and risk appetite. As the saying goes, smooth seas never made a skilled sailor - and the same can be said for traders. Keep reading
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