A pip is the smallest price that occurs in an exchange rate. For the most part, major currency pairs prices consist of four decimal places. The last decimal point is called a pip and for most pairs, this is equivalent to 1/100 of one percent. As most currency pairs have 4 decimal places a 1 pip move in the market would be a move up or down by 1 of the number sitting in the 4th decimal place spot in the quote. So for example the EUR/USD currency pair is trading at 1.0510 as of this lesson so a move to 1.0511 would be a 1 pip increase in the quote and a move to 1.0509 would be a 1 pip decrease.
As electronic platforms have brought greater price transparency to the forex market and price competition has heated up some platforms including ARGUSFX, have been using have added an additional decimal place to their quotes. Known as Fractional pips, now many of the currency pairs which have traditionally been 4 decimal places quoted out to 5 decimal places and the pairs which have traditionally been quoted out to 2 decimal places quoted out to 3 decimal places.
A lot is a trading term referring to a placed order of 100,000 units. The usual way to trade currency pairs is in standard lots (100,000), meaning that one is buying (or selling) 100,000 of the base currency while selling (or buying) the same number of units of the quote currency. A mini lot would then be of 10,000 and a micro lot of 1,000.
1 lot = 100,000 units
0.1 lot = 10,000 units
A spread is the difference between the buying price (the ask price) and selling price (the bid price) of a currency. The bid price is always inferior to the ask price.
Swap or rollover is the interest paid or earned for holding a position overnight. Each currency has an interest rate associated with it, and because forex is traded in pairs, every trade involves not only two different currencies, but their two different interest rates. If the interest rate on the currency you bought is higher than the interest rate of the currency you sold, then you will earn rollover (positive roll). If the interest rate on the currency you bought is lower than the interest rate on the currency you sold, then you will pay rollover (negative roll). Rollover can add a significant extra cost or profit to your trade.
When you buy the EUR/USD pair, you are buying the euro, and selling the U.S. dollar to pay for it. If the euro interest rate is 4.00%, and the U.S. rate is 2.25%, you are buying the currency with the higher interest rate, and you will earn rollover -- about 1.75% on an annual basis. If you sell the EUR/USD pair, you are selling the currency with the higher interest rate, and you will pay rollover -- about 1.75% on an annual basis, since you are paying the euro interest rate and earning the U.S. interest rate.
An ask rate is the buying price of the base currency.
A bid rate is the selling price of the base currency.
In a currency pair, the base currency is the one against which the other currency is quoted. For example, in the EUR/USD pair, EUR is the base currency and whenever one buys 1 Euro, the equivalent cost is paid in USD.
This is, in essence, your safety net in percentage – this term is interchangeable with the term ‘collateral’. It is the calculated required amount to have in your deposit in order to open a position on credit, as well as keeping that position open. Consider it as a part of your funds that is locked until the closing the open position, as you open a position using leverage with more capital than you have on your trading account.
Before the investor can place a trade, he or she must first deposit money into the margin account. The amount that needs to be deposited depends on the margin percentage that is agreed upon between the investor and the broker, ArgusFX in this case. For accounts that will be trading in 100,000 currency units or more, the margin percentage is usually either 1% or 2%. So, for an investor who wants to trade $100,000, a 1% margin would mean that $1,000 needs to be deposited into the account. The remaining 99% is provided by ArgusFX. No interest is paid directly on this borrowed amount, but if the investor does not close his or her position before the delivery date, it will have to be rolled over, and interest may be charged depending on the investor's position (long or short) and the short-term interest rates of the underlying currencies.
In a margin account, ArgusFX uses the $1,000 as security. If the investor's position worsens and his or her losses approach $1,000, ArgusFX may initiate a margin call. When this occurs, ArgusFX will usually instruct the investor to either deposit more money into the account or to close out the position to limit the risk to both parties.
A leverage allows you to open positions with more funds than you have on your trading account. This allows you to increase your return, but acts as a double-edged sword as it increases the risk accordingly. The amount of leverage provided is either 50:1, 150:1, 200:1 or 500:1 and depends on the account size (equity amount) and the size of the position the investor is trading. Standard trading is done on 100,000 units of currency (1 lot), so for a trade of this size, the leverage provided is usually 50:1 or 100:1. Leverage of 200:1 is usually used for positions of $50,000 or less.
To trade $100,000 of currency, with a margin of 1%, an investor will only have to deposit $1,000 into his or her margin account. The leverage provided on a trade like this is 100:1. Leverage of this size is significantly larger than the 2:1 leverage commonly provided on equities and the 15:1 leverage provided by the futures market. Although 100:1 leverage may seem extremely risky, the risk is significantly less when you consider that currency prices usually change by less than 1% during intraday trading. If currencies fluctuated as much as equities, brokers would not be able to provide as much leverage.
Although the ability to earn significant profits by using leverage is substantial, leverage can also work against investors. For example, if the currency underlying one of your trades moves in the opposite direction of what you believed would happen, leverage will greatly amplify the potential losses. To avoid such a catastrophe, forex traders usually implement a strict trading style that includes the use of stop and limit orders.
A bull market is one which is distinguished by ascending values. Consider it as the movement a bull makes when it strikes with its horns.
A bear market is one which is distinguished by declining values. Consider it as the movement a bear makes when it strikes with its claws.