A more positive trading experience begins with understanding the fundamentals of trading forex and other instruments. Learn more about some key trading terms below, including:
Currency pair, cross pairs, base currency, and quote currency
Currency pairs are the currencies of two countries combined together for the purpose of trading in the foreign exchange marketplace. Some examples of currency pairs include EURUSD, GBPJPY, NZDCAD, etc.
A currency pair that does not contain USD is known as a cross pair.
The first currency of a currency pair is called the "base currency", and the second currency is called the "quote currency".
Bid price and ask price
The bid price is the price at which the base currency is bought by a broker, and sold by a trader.
The ask price is the price at which the base currency is sold by a broker, and bought by a trader.
Spread
Spread is the amount of difference between the bid and ask prices of a trading instrument, and also the main source of profit for market maker brokers. The value of spread is set in pips.
Lot and contract size
The term "lot" refers to the quantity at which orders are counted. A standard lot is typically equal to 100,000 units of the base currency, but there are several lot types available:
Standard lot: 1 lot = 100 000 units
Mini lot: 0.1 lot = 10 000 units
Micro lot: 0.01 lot = 1 000 units
A contract size is a fixed amount of base currency in 1 lot which is commonly fixed at 100 000.
Pip, point, pip size, and pip value
A pip is the 4th decimal place of a price while a point is the 5th decimal place of a price; when a price changes it is measured by pips or by points.
A pip size highlights the position of the pip in the price of an instrument.
For example, where the price is 1.11115, the pip size is 0.0001 because it is the 4th decimal.
The pip value is how much money will be earned or lost if the price changes by 1 pip.
The formula for calculating pip value is:
Pip Value = Number of Lots x Contract size x Pip size.
Margin and leverage
Margin is the amount of funds withheld by a broker to keep an order open and is calculated in the trading account currency.
Leverage is the ratio of equity to loan capital, and impacts the margin held when an order is opened. KCM Trade offers leverage on some trading instruments for trading accounts that meet the equity criteria, but it is important to understand how unlimited leverage works before deciding to use this feature.
Balance, equity, and free margin
Balance is the calculated total of all completed transactions on a trading account, including deposits and withdrawals. It can be the amount of funds you have before opening orders, or after you have closed all open orders; the balance does not change while orders are open.
Equity is the balance of a trading account plus or minus total rolling profit or loss and swap charges.
Equity = Balance +/- Floating Profit/Loss + Swaps
While the broker holds a margin for open orders, the free margin is the funds remaining in the trading account that is not held; in other words, it is funds free to use for new orders.
Equity = Margin + Free Margin
Profit and loss
Profit or loss is the difference between the closing and opening price of an order.
Profit/Loss = difference of closing and opening price (in pips) x Pip Value
Buy orders: Buy orders make profit when the closing price (bid) is larger than the opening price (ask). If the closing price is smaller than the opening price, the buy order suffers a loss.
Sell orders: Sell orders make profit when the closing price (ask) is smaller than the opening price (bid). If the closing price is larger than the opening price, the sell order suffers a loss.
Margin level, and stop out
Margin level is the ratio of equity to margin denoted in %.
Margin level = (Equity / Margin) x 100
Pending and market orders
A limit order is a pending order with the instruction to execute a trade at a price more favorable than the current market price. The order fills when the market reaches the specified price.
There are 4 different limit orders:
Limit orders:
Buy Limit - is an order to buy at or below the current ask price.
Sell Limit - is an order to sell at or above the current bid price.
Stop orders:
Buy Stop - is an order to buy at a price above the current ask price.
Sell Stop - is an order to sell at a price below the current bid price.
Extra MT5 order types:
Buy Stop Limit - an order combination of Buy Stop and Buy Limit. This order requires two prices which must both be reached before this order is executed.
Sell Stop Limit - an order combination of Sell Stop and Sell Limit. This order requires two prices which must both be reached before this order is executed.
A market order is a method of executing a buy or sell order immediately at the current market price. In volatile markets, slippage may significantly affect the filled orders; prices can be either higher or lower than the intended market price seen in the terminal window.
Risk management
It is important to note that trading in the financial markets carries a high level of risk and may not be suitable for all investors. It is crucial to thoroughly research and understand these markets before making any trades and to never invest more than you can afford to lose.
Additionally, it is important to use sound risk management techniques and to regularly monitor your trades to ensure that your positions remain within your risk tolerance.
