Updated: Jan 6
If you’re new to forex trading and reading everything you can on the internet, you’re likely to be faced with plenty of nonsense😂 and terminology.
Don’t be frightened off course by the language used in the trading industry. Like every industry, trading has its own nuances but once you invest the time getting your head around what it all means, you’ll be well on your way to building your trading skillset and confidence.
To help get you started, we’ve compiled 10 of the most useful trading terminology we believe all our new clients should know😉:
Leverage is the foundation of your trading experience with us. It involves borrowing an amount of money to trade. By placing a small percentage of the total market exposure as margin, it opens up a world of opportunity to speculate or even protect portfolios.
The lower the required initial margin or the deposit on the full market value of the position, the higher the leverage, and vice versa. Leverage differs depending on what instrument you’re trading and what jurisdiction you fall under.
What leverage of 500:1 means is that for every $1 that you have in your trading account, you can achieve a $500 notional exposure in the forex market. This doesn’t mean a cash balance of $1,000 will force you to enter trades of $500,000 (the maximum leverage possible). Think of trading with leverage as driving a car: you don’t always need to drive at full speed and especially not on a dangerous road.
This is where position sizing is important. Naturally, the scale of leverage our traders use carries varying degrees of risk, so understanding your correct position sizing is important. Higher leverage offers increased market exposure, which can be attractive for those with the experience and skills who can harness this to drive larger swings in profit or loss (P&L), or detrimental to the portfolio of someone new to trading without a risk management plan in place. Read more about how to manage risk and calculate your position size.
Margin, also known as your deposit, is the amount of capital in your account required to be placed to open a position. Margin is a function of the desired notional exposure to a particular market and the leverage ratio.
For example, you want to buy 0.1 lots (10,000 units of the base or first-named currency) of EURUSD at the current offer price of 1.13500, and with a leverage ratio of 30:1.
If the base currency of the account is in EUR, then we calculate the initial margin as: (1.13500 * 10,000) / 30 = $378.33.
In this example, $378.33 is the amount of margin required to open a 0.1 lot position in EURUSD.
Once a position has been established and an initial margin of $378.33 has been placed, you’ll be accruing a real-time profit or loss.
If your equity, which is the remaining balance on the account adjusted for the aggregated profit or loss, falls below a specific level then you may receive a margin call.
If you get a margin call, you’ll need to fund your account to support the current open positions.
If no additional funds are received by a set time, then your open positions may be automatically closed.
A stop-loss is an excellent risk management tool, especially when combined with correct position sizing relative to the size of the account and adjusted for market volatility. It effectively allows you to understand how much risk you’re taking on in any given trade.
It’s important to understand that a stop-loss is a market order and a trigger point. If the price trades through the specified stop-loss level, an order is activated to close the position at the prevailing market price at that time. Should the market be trading at a different level from the stop-loss level at that precise moment of execution, then the stop may be filled at a better or worse price. This is known as slippage.
The degree of slippage is down to a number of factors, including volatility in the market and liquidity. Naturally, slippage should be a key consideration when heading into a period where markets are closed such as weekends or public holidays when important news sometimes breaks and we see markets reopen at materially different levels. This is known as gapping.
Spread is the cost or charge to trade, and represents the difference between the buy (bid) and the sell (offer) price. While risk management and correct position sizing are core considerations for any successful trader, the primary objective of trading in the first place is to grow the capital in your account. Your objective should be for the bid price to move higher than where you originally bought (to open) a position. Or, in the case of opening a short position, the offer price should move below the point at which you originally sold (to open). This is a concept also known as beating the spread. You may test our Trusted Broker for the lowest spreads in the industry.
Pips and points
These are a measure of the price change that will determine your profit and loss. The number of decimal places you see quoted for an instrument (such as EURUSD) on Metatrader 4, 5 will determine the movement in pips.
On a 5 decimal place currency pair a pip is 0.00010
On a 3 decimal place currency pair a pip is 0.010
On a 2 decimal place currency pair a pip is 0.10
Trader tip: A pip is always the second last digit. A point is always the last digit. For example, if you want to purchase (long) of 0.1 of a lot in EURUSD at 1.13500 moves to 1.13510, that .00010 USD move higher is a gain of one pip which is 10 points.
Traders pay spread when opening and closing a trade, representing the cost to trade or the effective commission. Another important thing to consider when holding a position is the interest adjustment made to the account at the rollover point each day at 5 pm EST (New York time) or 00:00 server time. This replicates the underlying spot FX market and is an important consideration given many traders will close a position ahead of this time.
As currencies are traded in pairs, traders make a call that the one currency will appreciate or depreciate against another so the capital gain or loss is their primary consideration. It's also important to consider the interest adjustment, which is determined by the two respective interest rates.
If the interest rate of the currency a trader bought is higher than the corresponding interest rate of the currency a trader sold, then the trader will earn interest. This is known as a positive roll, or carry.
If the interest rate on the currency the trader bought is lower than the interest rate on the currency they sold, then the trader will pay rollover interest known as a negative roll.
Swap rate differentials are a function of the duration of holding and position sizing and can be an additional cost or profit to each trade over time.
Long and short
These are two of the most commons terms used by traders in all forums and at all levels of ability. These two terms express a directional bias on where an instrument, or market, is expected to head over a set timeframe.
Long is the action of buying, or to take a view that the price will appreciate.
To be short is the same as selling short to open a trade and holding a negative bias that the price will decrease.
We offer a demo account for all our clients that replicates the live trading environment and offers traders hypothetical starting capital. The demo platform allows traders to understand the platform, the market environment as well as charting and execution all while trading with virtual funds.
Trading on a demo account is an excellent way to gain confidence in your ability to manage risk, understand correct position size and get used to the unique characteristics of a market. It can be a useful tool to practise your trading strategies on before stepping up to a live account. Open a demo account today and start trading with virtual funds.
Technical and fundamental analysis
These are two important disciplines that sit at the heart of the trading plans and methodologies that we use to define our trading edge and develop a positive expectancy.
Many will look at trading one in isolation, however, combining the two disciplines can be incredibly powerful.
Technical analysis involves the use of charts to better understand market behaviour and ascertain probability as well as the risk-to-reward trade-off. Along with price action analysis, it can be a potent tool to understand the potential for a future move, as well as providing insight to help with risk management.
Fundamental analysis involves the interpretation of news flow and how new information can affect the pricing of markets. Think of it similar to a journey. Fundamental traders aren’t just concerned about moving from A to B, they want to understand what caused the move and what will make the move to C.
In forex trading, having an understanding of what actually drives a currency is vital. This is so we can take a view on how that independent variable may react and what could be the implications for the currency.
For example, we know over one-third of Australia’s exports are transacted with China, so the AUD (Australia dollar) is often highly sensitive to Chinese data, or changes to monetary or fiscal policy. Therefore a trader may look to buy the AUD should they feel the Chinese central bank (the PBoC) will cut rates to spur domestic consumption.
One of the reasons why MetaTrader is one of the most popular platforms in the world is its ability to use expert advisors, or EAs.
An EA is a set of predefined instructions programmed to automatically execute trades in a market where, as long as the EA is turned on, it runs without any human involvement. The objectives of an EA can be incredibly diverse and will differ in complexity, however one reason why they’re so popular is that the user can download their EA on to the MetaTrader platform without any coding experience at all.
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