The Trading Terminology and basics

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Symbol: 

Currency Pair (e.g. EUR/USD or USD/JPY etc.), Index CFD (Dax, Ibex, etc.), Commodities (Oil, etc.), Single Stock CFDs(Apple, Intel, etc.) 

Market Order: 

Opening a position with the current market price. When I decide to buy or sell, my order will be executed with the current market price. 

Pending Order: 

A pending order is order which is “scheduled” for the future. The order will be executed once a special price is hit. For every pending order I can set the expiry date accordingly. 

Base currency: 

the currency that you chose to either Buy or Sell.

Quote currency: the currency in which the pair is quoted. 

  • Base Currency vs. Quote Currency:  The first currency in the pair is called "base currency" and the second currency „quote currency". If we trade EUR/USD, then EUR is the base currency we buy or sell and the price is quotes in USD. 

 

Bid price: 

the broker is willing to buy at this price.

 

Ask price: 

the broker is willing to sell at this price. 

  • Bid/Offer or Bid/Ask price: In every instrument we have a bid and ask price. Thus a pricing schema looks like this: EUR/USD Bid: 1.2000 Ask 1.2003. The bid price is relevant if you want to go short (sell), the ask price is relevant if you go long (buy or buy back). Sometimes people also say Bid/Offer.

 

Position: 

opening a trade based on a currency pair or another instrument. You can go short or long on a position.

Short position (SELL): 

If you "go short“ you basically sell (bid price) an instrument (which you do not own at the moment) at a specific price but you only can sell it with the obligation to buy it back in the future. If the price falls after you entered you make profit. If the market goes "against you“ you will buy back at a higher price and face a loss. 

  • Example 1 (In favor of you): You sell at 1.0000 and then buy back at 0.9000 -> Profit 0.10
  • Example 2 (Against you): You sell at 1.0000, market goes against you, you need to buy back 1.0020 -> loss of 0.0020.

 

Long position (BUY): 

If you "go long" you speculate on increasing prices and offer a specific amount of money at a current pricing.If the market goes in your favor and the value increases you make a profit,if it goes against you, you lose. 

  • Example 1 (In favor of you): You buy at1.0000 and price goes up to 1.1000, you sell and make a profit of 0.1000.
  • Example 2: (Against you) You buy at 1.0000 and price goes down to 0.9000, yousell and make a loss of 0.1000. 

 

Pip: 

In Forex the fluctuation of prices is extreme, in currency pairs the 3th and 4th digit after the dot is important. That`s why Prices are always displayed like this: 1.20341 The fourth digit is called PIP. In Currencies where you only have three digits after the dot (e.g. EUR/JPY) the second digit is a PIP.Based on the Lot (Volume), Pips have a specific value. The calculation is the following: If you trade at a $100.000 volume (1.00 LOT) , every 4th digit after the dot is worth $10. Why? Because every single pip movement four digits after the dot = 0.0001. 

100.000$ / 0.001 = 10$ per Pip. Thus if you trade at a 0.1 Lot = $10.000 that means 10.000/0.001 = 1$ per Pip

Or a 2.0 Lot = $200,000 -> 200,000/0.001 = $20 per Pip. 

PIP stands for ‘Point in Percentage’. The Spread is also quoted in Pips. Spread is the difference in Pips between the ASK price and the BID price. This is why the ASK price is slightly higher than the BID.


Bid/Ask Spread: 

As seen in the Bid/Ask Price on a Symbol, there is a specific distance between both prices. This is the so-called "Spread“. Traders enter the positions always worse than the current price is, this difference is the "commission" you pay to your broker to open a position, the traders need to wait until the market moves in their direction. 

Leverage: 

due to minor price movements, it is important to move larger volumes. In order to allow this, brokers offer specific leverage ratios which decrease the required capital injection to execute a trade. 

Mostly it is between 1:50 to 1:200. This means that a Trader only needs a 1/50th or 1/200th of money in the account to move a volume. f you choose a lot of 1.0 ($100,000) and you have a leverage ratio of 1:200 set, then you only need $100,000/200 = $500. This amount is called "Margin“ to move this large position. With an input of $500 you can make $10 per pip movement. But! You can as well loose $10 per pip movement. 

Lot: 

a lot is the volume you buy a symbol with. In Forex a Standard Lot is 1.0 which yields 100,000. A Mini-Lot is 0.1 which yields 10,000 and a micro lot is 0.01 which yields 1,000. Most traders trade a range between 0.5-2.5 (50,000-250,000) Lots. 

Margin: 

The Margin is a security deposit. If you open a 1.0 Lot position you need to have at least the un-leveraged amount in your cash account. With a 1:200 Leverage you need to have $500 in your account to secure the $100,000 position.

Once you close the position the margin will be returned back to your balance.

Margin Call & Stop Out: 

A margin call is generated when the equity balance in an account drops below the margin requirement for the account. If the maximum allowable leverage has been exceeded, any open positions are immediately liquidated (Stop Out), regardless of the nature or the size of the positions. Usually the biggest position is liquidated first. 

Margin calls occur most frequently from excessive leverage on an account. You want to manage your leverage carefully so that your positions can handle fluctuating market moves. The more leverage you use (too many trades open at a time or trades too large) the faster your losses can accumulate.

You can read more about Margin Call and Stop Out here

Stop Loss (SL): 

due to the leverage and high fluctuations, traders can loose and win very quick. Basically you need to watch the market every millisecond, but there are also limits. If you set Stop-Loss Limits you basically work with a safety-net and limit your potential losses. 

  • Example: You went long (bought) and entered a ask price of 1.2000 with a 1.0 LOT (100,000). Now the market moved against you and the bid price decreased to 1.1940. This means basically you lost: 1.2000 –1.1940 = 0.0060. 60 Pips * $10 per pip = $600 is your current loss. Some traders set a STOP LOSS before they open a position. Such that you can limit and say: If EUR/USD is going lower then 1.1980 – please directly close the position. Such in that case if you would have set a SL of 1.980 – you would have lost less and you do not need to close the position manually. It closes automatically by the system.

 

Take Profit (TP): 

As describe above, the Take Profit allows you to set limit when you want to realize profits. When you go short for example on EUR/USD and you bet on falling prices then you set a limit where you directly want to buy back the option and realize a profit automatically.


Trading example with SL & TP:

Action: 

BUY EUR/USD at 1.2050 offer, Lot=1.0, Stop Loss: 1.2000, Take Profit: 1.2120, Leverage 1:200

Facts

Every pip = $10, you need to have $500 Margin, your max loss is -50 pips (1.2050 –1.2000 = -0.0050) if you hit SL (50*10$ = $500) and you max Profit is +70 pips (1.2120–1.2050 = + 0.0070) if you hit TP (70*$10 = $700) Result

You need to deposit $500, can’t lose more than $500 and you have a chance to make $700.

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