- What is equity ?
Equity is your deposited amount into the trading account +/- your realized profit and loss +/- your running profit and loss.
2. What is balance ?
Balance is the amount deposited into your trading account +/- your realized profit and loss.
3. What does going long or going short mean ?
Long refers to buying an underlying asset. For example, if you buy Gold at 1300 you have went long Gold. Thus, a trader will make money if price goes up and loose money if price goes down from his entry price.
Short refers to short-selling or selling the asset and making money if price goes down. So if you sell Gold via CFD you have went short. The concept of shorting can be confusing for people new to trading, however, it is easy to think of it in terms of betting on price going down.
4. What is a "standard lot" and "round lot"?
Standard lot refers to 100,000 units of a currency. Thus, if a trader buys 100,000 EURUSD he is long 1 lot EURUSD.
Round lot refers to the fact of opening and closing a position with the size of 1 lot. The concept of "round" comes from the idea that the deal does a full round - in and out. This is usually used by brokers to define their fees. In the case of XBTFX we charge $8 on our ECN account per Round Lot or $4 per side (opening and closing).
5. What is leverage ?
Leverage is basically a loan on your deposit. Thus, if you have a $1,000 deposit with your broker with 100:1 leverage you can get into a position that is 100 times your deposit or in this specific case that would be $100,000 that you can use to enter a position.
Leverage is closely tied to the concept of Margin which we will cover in the next point.
6. What is margin?
When trading on leverage, your broker will allocate a portion of your trading account size as the collateral for the leveraged trade. This collateral is called “margin” and its size depends on the leverage ratio that you’re trading on. A leverage ratio of 100:1 asks for a margin that equals 1% of your position size.
Let's think about the example above, but say you deposited $5,000 into your account. When you enter into a position that is $100,000 with 100:1 leverage $1,000 of that money will be margin. That money is essentially locked into the position. Entering new positions while keeping other positions on will increase margin. In the event you use up all of your $5,000 margin you will get a margin call if your equity drops under a specific amount. That amount depends on your leverage setting.
With the example above if you enter into a $100,000 position with $5,000 deposit, you will get a margin call if your equity drops under $1,000 and you will usually get liquidated.
What’s important when trading on leverage is to always keep an eye on your free margin. Your free margin equals your total equity (account size + any unrealized profits/losses), minus your used margin. If your free margin drops to zero, you’ll receive a margin call and all your open trades will be closed at the current market rate.
7. What is a currency pair ?
Forex trading is the simultaneous act of buying one currency while selling another.
The combination of these two currencies make up what's known as a currency pair. Currencies are always traded in pairs, and each currency in a pair is represented by a unique three-letter code.
The first two letters in the code represent the country, and the third letter identifies the currency, such as the code JPY = Japanese Yen. Forex prices are known as rates, and they express the value of one currency in terms of the other.
8. What is a pip?
When FX traders talk about profits or losses, they usually use the term “pips”. A pip is short from Percentage in Point and represents the smallest increment that an exchange rate can move up or down. Usually, one pip equals to the fourth decimal of most currency pairs.
For example, if EUR/USD is currently trading at 1.1558 and rises to 1.1562, that rise would equal to a change of 4 pips. However, some currency pairs have their pips located at the second decimal place, mostly yen-pairs. If USD/JPY currently trades at 110.25 and falls to 110.10, that fall would equal to a change of 15 pips.
9. What is a bid/ask price ?
At any given moment, each currency pair has two exchange rates or prices – the bid price and the ask price. What’s the difference between those two? The bid price is the price at which buyers are willing to buy, while the ask price is the price at which sellers are willing to sell.
Given its nature, the bid price is always lower than the ask price. Once those two prices meet, either when sellers lower their ask price to meet a buyer’s bid price or when buyers increase their rate they’re willing to pay for a currency and meet a seller’s ask price, a transaction occurs.
In the end, buyers buy at the ask price, and sellers sell at the bid price. This means that each price plotted on your chart represents the market equilibrium at that point of time – the price at which the majority of market participants are willing to transact.
10. What is spread ?
Each time you enter into a trade, you have the pay transaction costs for that trade. While most brokers don’t charge commissions and fees on placing trades nowadays, the bid/ask spread remains the main cost to Forex traders. When bulls buy at the ask price (the price at which sellers are willing to sell), their position is immediately in a loss that equals the bid/ask spread.
If you’re a day trader or scalper, you need to pay attention to the bid/ask spread since it can eat a large portion of your profits at the end of the day. Swing traders and position traders who have a longer-term approach to trading are less affected by the spread as they open a smaller number of positions and have relatively higher profit targets.