A fundamental understanding of the basics when trading forex and other instruments helps provide a more positive trading experience. Find out more about some important trading terms below, including:
- Currency pair, cross pairs, base currency, and quote currency
- Bid price and ask price
- Lot and contract size
- Pip, point, pip size, and pip value
- Margin and leverage
- Balance, equity, and free margin
- Profit and loss
- Margin level, margin call and stop out
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.
Buy orders open at the ask price and close at the bid price.
Sell orders open at the bid price and close at the ask price.
Spread is an 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. It is recommended to read more about what spread is, and how dynamic and stable spreads differ.
Lot and contract size
Lot refers to a measurement of quantity at which orders are counted. Typically, a standard lot is equal to 100 000 units of the base currency but a variety of lot types exist:
- Standard lot: 1 lot = 100 000 units
- Mini lot: 0.1 lot = 10 000 units
- Micro lot: 0.01 lot = 1 000 units
- Nano lot: 0.001 lot = 100 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.
1 pip = 10 points.
If a price changes from 1.11115 to 1.11135, it is measured as 2 pips or 20 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.
This is the formula for calculating pip value:
Pip Value = Number of Lots x Contract size x Pip size.
Margin and leverage
Margin is the funds withheld by a broker for keeping an order open, and 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. Exness offers unlimited 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.
The higher the leverage, the lesser the margin.
Follow the link to learn much more about how leverage impacts margin requirements.
Balance, equity, and free margin
Balance is the calculated total of all completed transactions, including deposits and withdrawals, on a trading account. 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 combined with all current profit and/or loss while any order is open.
Equity = Balance +/- Floating Profit/Loss.
While margin is held by the broker for open orders, free margin is the funds remaining in the trading account that are 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 make a profit when the price moves up while sell orders make a profit when the price moves down.
Buy orders make a loss when the price moves down while Sell orders make a loss when the price moves up.
Margin level, margin call and stop out
Margin level is the ratio of equity to margin denoted in %.
Margin level = (Equity / Margin) x 100
A margin call is an alert sent in the trading terminal warning that it may be necessary to deposit funds or close a few orders to avoid stop out. This notification is sent once the margin level drops to a certain amount, known as the margin call level; the margin call level is set by account type.
Stop out is the automatic closing of orders when the margin level drops to the stop out level (0%) but it is possible to set a custom stop out level.
Some Exness trading accounts may operate under mid-price stop out, which is explained in greater detail in this article about stop out levels for various account types.