FX & CFD Trading Terminology
Forex and CFD investing is just like any endeavor, where preparation is a valuable instrument. Understanding and familiarizing yourself with terminology is valuable asset for any trader.
- QuoteAn indicative market price, when used in Forex, refers to the prevailing exchange rate of the quoted currency at that moment. 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 Bid or selling price, while the second is the Ask or buying price.
- Bid/AskThe Bid or the selling price is the exchange rate at which a currency is offered for sale. The Ask or buying price is the exchange rate at which a currency can be bought.In the example above the EUR/USD pair (Euro vs. US dollar) 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 were buying the quoted currency, then the quote tells you that to buy Euros for US dollars, you would need to pay 1.5037 dollars per 1 euro.
- LotA lot is the standard unit size of a transaction. It represents the minimum quantity which can be traded in any given instrument.For Forex Trading, Markets.com standard lot size is 1,000 units of the quoted currency.
For CFD Trading, the standard lot size varies from 1 to 500 units of the quoted CFD.
- PipThis is the smallest value in a currency quote and 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.Profits on a trade can be expressed in pips, for example: Suppose you bought the EUR/USD at an exchange rate of 1.5016 and sold it at an exchange rate of 1.5037. 37-16=21. You made a 21 pip profit.
- Pip ValueThe pip value can be either variable or fixed, depending on the currency pair it refers to and the base currency (i.e. measuring currency) of your account. The pip value is also a function of 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 currency, then simply multiply this 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:
0.01/128.92 = 0.00007756 GBP
0.00007756 x 5,000=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.
- SpreadThis is 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 in this case is 3 pips. Low spreads ensure that traders can get in and out of their trades at very low slippage.
- MarginThe amount of funds required to open or maintain a position. It is usually expressed as a percentage of the open position. You may have a margin requirement of 0.5%, which would mean that in order to hold a position of 100,000 EUR/USD, an equity level of 500 euros or more must be maintained.
- LeverageThis is the use of borrowed capital to increase 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 the potential return, but it can also significantly increase 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 can now open trades worth $200,000.
- InterestIn a sense, interest is the price of money. It is the amount paid on loans and received on deposits.
- LongA trader going long expects the price to go up when buying a currency pair or a CFD.
- ShortA trader going short expects the price to go down when selling a currency pair or a CFD.
- Value dateThe date on which counterparts to a financial transaction agree to settle their respective obligations, i.e., exchanging payments.
- RolloverProcess where the settlement of a deal is rolled forward to another value date and a charge is levied based on the difference in rates of interest of the two currencies. Every day, at 21:00GMT, open positions are rolled over to the next day and the positions gain or lose interest based on the interest differential between the bought and sold currencies.If you buy overnight a currency pair where the base currency has a higher interest rate than the terms currency, then you’ll receive interest and vice versa.