Forex terminology .
It is very important to understand the terminology in the Forex market. That’s way I need your full focus right now! Make your head clear, drink a cup of good coffee and start learning these important terms.
Forex terminology – PIP
You’ve met the PIP yet.
Cute little happy word isn’t it? Well that’s exactly what it is since this cute little word will make you very happy and rich if you use it the right way.
You need to completely understand how to calculate your wins and losses through the PIP.
Otherwise don’t even bother start trading.
The unit of measurement that indicates the change in value between two currencies is what you call a ‘pip’.
If the EUR / USD pair rises from 1.2250 to 1.2251, then the .0001 USD increases in value 1 PIP. Simply, a pip is the last decimal figure of a quote. Most pairs are shown to four decimal places, but there are exceptions such as the Japanese yen (to two decimal places).
But watch out! There are brokers that show currency pairs different from the standard “4 and 2” decimal, but instead using’5 and 3′ number decimals.
What they actually do is showing fractional pips, “which are also called ‘pipettes.
For example: GBP / USD 1.51542 1.51543 moves, then it rises .00001 1 PIPETTE. As each currency has its own relative value the value of the pip must be calculated for a specific currency pair.
We give an example in which we use a ratio of 4 decimal places. In order to explain the calculations easier we exchange ratio set down like – so: EUR / USD at 1.2500 is “1 EUR / USD 1.2500.
Example exchange rate:USD/CAD = 1.0200; or 1 USD to 1.0200 CAD; or 1 USD/1.0200 CAD.
(The value change in the “counter currency”) X (the exchange ratio) = pip value (in terms of the base currency)
Continuing this example, if we sell 10,000 units USD / CAD, then one pip change of exchange rate changes of approximately 0.98 in the position value (10,000 units x 0.00009804 USD / unit).
We say “approximately” because when the exchange rate changes, the value of each pip move is also changing. Last important question that needs to be answered if you calculate the pip value of your position is: ‘What is the value of your pip in terms of your account currency?’ You’re trading at an international market you remember? So not everyone on the whole world has chosen the same currency for their account.
Shortly, the value of the pip needs to be converted to the currency used at your account.
Forex terminology – Spread.
Simply spread is the difference between bid and ask price. Spread is used by brokers to make money of every trade that takes place through their network. Example: Broker pays 1.3600 and sets the price at 1.3601 for you to buy. Spread will always be around the price the broker paid. Whenever your trade you’ve paid the spread. There is nothing you can do about it. That’s just the way brokers make their money. TIP: search for a website “broker” with the smallest spreads.
⦁ Cross Rate. ( Forex terminology )
The exchange rate between two random currencies that are not considered standard in the country where the pair is quoted. For example: the quote of the GBP/JPY pair would be considered a cross rate in the U.S. While EUR/USD is a cross rate in Japan.
In Forex trading the use of leverage is pretty common. Leverage needs to be completely understood because it plays an important role in the purchasing power of your account.When opening an account you have the option to chose your leverage. It simply gives you the opportunity to trade bigger positions than your real bankroll let’s you.
Just to give you an example:
Suppose you have a thousand euros on your account and you act with a leverage of 10: 1, you can then buy 10,000 EUR / USD. Then, when the price increases on the pair two cents per euro it means that you have earned 200 euros after you close the position. It can also happen that the price of a penny decreases and then you have a loss of two hundred euros when you close the position.Your profit or loss is actually the difference between the amount on your account and the outstanding gains and / or losses.
⦁ Margin. ( Forex terminology )
Margin is the ammount needed to buy a new position. With a margin balance of €1.000,- and a 1% margin requirement you can buy a maximum position of €100.000,- euro. With this given you are able to use a leverage of 100:1.
The higher your leverage the more margin you will need on your account. So, when you open to many positions or your losing position is going further down the balance on your account could be too low to meet your obligations. When this happens your broker will give you a so called “Margin Call”. This means you need more margin (account balance) to hold on to your position. Most of the time when the margin percentage gets under 50% your broker will close that particular position with a loss.
When you decide to trade with big leverages or open a lot positions simultaneously you have to be careful because you don’t want to get that Margin Call.
Word of advice: Calculate your lot sizes to prevent big losses.
Best broker: IC MARKETS.