Forex Trading Terms Explained
FX beginners may find the task of learning new terms and phrases a little bit daunting. The terms explained below are the most basic ones you need to know before you start trading on a real account.
The size, or volume, of a trade, is often calculated in “lots”. In FX trading, one lot represents 100,000 units of the base currency of the pair you are trading.
At FxPro, the minimum lot size for MT4, MT5 and cTrader is 0.01 (1000 units).
Pips, Ticks and Spreads
A “pip” is the smallest increment in which a currency pair can move. It is usually the fourth decimal place of the quote currency in a pair. In the case of the Japanese yen (JPY), the pip is the second decimal place of the quote currency.
Pips help traders determine profit or loss, which are calculated according to the number of pips that a currency rises or falls in relation to the price at which it was bought or sold.
To calculate the pip value in the quote currency of a currency pair:
Pip in Decimal Places X Trade Size
To calculate the pip value in the base currency of a currency pair:
Pip in Decimal Places X Trade Size / Market Price
The fifth decimal place of most currencies and the third decimal place of the Japanese yen is called a “point.” Points give traders a more accurate indication of price movements.
While a pip is the smallest increment by which a currency can change in value, a “tick” is the increment by which it actually does. So, for instance, if EUR/USD moves three times in a minute (1.10345 to 1.10456, and then down to 1.10234), each of these moves, even though they may be greater or smaller than a pip, are known as ticks.
The “spread” is the difference between the Bid and Ask prices of a currency pair.
to learn more about the spreads FxPro offers
Leverage and Margin
“Leverage” and “margin” enable traders to control positions that exceed the value of their initial investment.
Leverage allows you to trade larger volumes and is expressed as a ratio. Look at the following table to see how it affects your trade size:
FxPro offers leverage up to 1:500
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for more information.
Margin is the percentage of your account balance that is required to secure your positions. The more leverage you use, the less of your account balance is required as margin.
To calculate required margin in base currency:
Trade Size in Units / Leverage
To calculate required margin in quote currency:
Trade Size in Units / Leverage X Exchange Rate