Positive trading experiences are built on the confidence gained from understanding the fundamentals, whether just starting to trade or a veteran. We break down the important trading terms needed to truly trade with confidence.
Click any link to learn about these key trading terms for these topics:
- Bid and ask price
- Trading instrument
- Profit and loss
- Market and pending orders
- Order execution
- Hedged orders
- Order price
- Order volume
- Stop out
- Risk management
An order is a single instruction from the trader to the broker to execute a trade (buy or sell). An order is made using a trading platform, and includes a number of different order types (including market and pending orders, which are discussed in more depth below). Find out more about how quotes are calculated for orders.
These currency terms are important to know when trading forex instruments.
- Currency pair: currencies of 2 countries combined for the purposes of foreign exchange, i.e USDGBP, GBPJPY, NZDCAD.
- Cross pairs: any currency pair that does not include USD is considered a cross pair, i.e GBPJPY, NZDCAD
- Base currency: the first currency shown in a pair, i.e GBPUSD, NZDCAD
- Quote currency: the second currency shown in a pair, i.e GBPUSD, NZDCAD
Bid 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.
An instrument falls under one of many categories of asset on which an order is opened. The asset is a CFD (Contract for Difference) product where the order cares about the value of the asset. We recommend reading more about trading instruments available for a detailed look at their trading conditions.
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.
Market and pending orders
A market order is an order that is executed immediately at the current market price. During volatility, slippage may occur, where the actual executed price is either higher or lower than the requested market. Learn more about requotes, the notification sent whenever slippage occurs.
A pending order is a request to execute an order only when specific price conditions are met. There are 3 main types of pending 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.
- 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.
Stop Limit orders (MT5 only)
- Buy stop limit is an order combination of buy stop and buy limit, and requires two prices which must both be reached before this order is executed.
- Sell stop limit is an order combination of sell stop and sell limit, and requires two prices which must both be reached before this order is executed.
Our article about available order types for trading accounts goes into greater detail about these pending orders and their use.
When an order is created, it is done with either one of two executions: market and instant. These execution types determine the method at which the order is fulfilled.
- Market execution is an order opened within moments of a trader opening the order, and in circumstances may experience slippage.
- Instant execution is an order where the order is opened at the price shown in the trading platform, or not at all. Should the price change, a requote notification will be sent to the trader before the order is opened.
Hedged orders, also known as offsetting orders, are orders made for the same instrument in opposite directions. For example, 1 lot Buy EURUSD and 1 lot Sell EURUSD. Read more about hedged orders in our article that goes into greater detail about them.
Orders are opened at a price specified by the trader. These are terms used to describe parts of the order price:
The price of an order is typically shown as a number with up to 5 decimals, i.e 12.34213, 1.53212
- Pip: the 4th decimal place of a price, i.e 12.34213, 1.53212
- Point: the 5th decimal place of a price, i.e 12.34213, 1.53212
Price change is measured in pips and/or points, so a price change from 1.11115 to 1.11135 is measured as 2 pips or 20 points. It’s helpful to remember that 1 pip = 10 points.
Note: some instruments approach pips and points uniquely based on the price format of that trading instrument. See the below table for these specific instruments:
|Gold, Silver, JPY
|Price format example
Pip size and pip value
These terms are often used when the price of an order is discussed:
- Pip size is the value of 1 pip in the price of an instrument. The term is used both as value, as in the pip size of the price 1.11115 is 0.0001, and as a solution, as in the pip size of a price changing from 1.11115 to 1.11145 is 0.0003.
- Pip value is how much is earned or lost if a price changes by 1 pip, and is calculated as: Pip value = number of lots x contract size x pip size
The volume of an order, which is the quantity of an instrument in an order, is often determined by the lot size and contract size of the specific trading instrument.
A lot refers to the amount of the instrument in an order, i.e 3 lots of USDGBP is how much of this currency pair is included in the order.
A standard lot is typically 100 000 units of the base currency, but several lot types exist including:
- 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
- Cent lot: 1 cent lot = 100 000 cent units (Standard Cent accounts only)
The contract size is a fixed amount of base currency in 1 lot, commonly fixed at 100 000.
We recommend reading about how order volume is calculated, as this topic is complex and differs greatly on the trading instrument and trading account used.
Spread is the difference in pip value between the bid and ask price of a trading instrument, which is the amount charged by the broker for opening the order; this is the main source of profit for market maker brokers. Spread includes dynamic and stable spread types, so can be a very complex topic.
We recommend reading our detailed article about spread for more.
Balance is the total monetary value of a trading account, including all completed transactions, deposits, and withdrawals. It is the total funds in a trading order before opening orders, and after closing open orders. Balance doesn’t change while orders are open as it doesn’t include the profit or loss of open orders.
Equity is the balance of a trading account, but includes the amount of accrued profit or loss and swaps. Equity also includes free margin (discussed below).
Equity = Balance +/- Floating Profit/Loss + Swaps
Margin is the amount of money reserved to keep an order open; it is calculated in the trading account currency. Margin is also important to understand when free margin, margin level and margin call is discussed, which we define below.
We recommend reading more about margin, as this topic is complex.
Free margin is the balance of funds in a trading account that is not being held as margin for open orders; new orders require enough free margin to cover the margin cost and spread.
Margin level is the ratio of equity (see above) to margin denoted as %, calculated: Margin level = (Equity / Margin) x 100.
Margin call is a notification sent to traders by their trading platform when equity and margin drops to when it may be necessary to deposit funds or close open orders to avoid stop out (discussed below). Margin call is sent when margin and equity falls to a predetermined margin level; margin call is determined by trading account type.
Stop out is the method of automatically closing orders when the margin level of a trading account drops to the stop out level (0%). When stop out happens, orders on the trading account will close automatically until the margin level is above the 0% stop out level, or all open orders on the trading account are closed (whichever comes first).
Hedged orders can experience stop out in certain circumstances, which are detailed in our article about hedged orders.
Read more about stop out protection, a trading feature that can help delay stop out in some cases. We also have a detail that goes into greater detail about the circumstances that can cause stop out with margin and leverage.
Leverage is the ratio of equity to capital provided by the broker, affecting the margin required for an open order. Leverage is expressed as 1:2, 1:200, etc, based on the margin of the trader against the loaned capital of the broker. We highly recommend learning more about leverage as it carries unique risks for traders who use it.
The higher the leverage, the less margin is required.
Exness offers unlimited leverage for some trading instruments when trading accounts meet a specific equity criteria. It is critical to understand how unlimited leverage works before deciding to use this feature as it increases risks for any order.
Swap is an interest applied to open orders overnight. Swap is applied to trading accounts at 21:00 GMT+0 each day, until the order is closed. There is a lot more detailed information about this topic in our article about swap.
Risk management involves limiting the exposure of your trading account to potential losses.
Traders typically develop comfort with a trading strategy that suits their risk appetite. Trading always carries a certain level of risk, so may not be suitable for all investors. Having a risk management strategy before trading is essential.
One good risk management strategy is to never invest more than you can afford to lose.
Regularly monitor your trades to ensure that your orders remain within your risk tolerance.
We recommend reading more about some of the trading features offered by Exness to see how they may work with your trading strategies and/or risk management.