In order to understand the world of trading with complete clarity, here are the definitions of the basic terms and symbols that you need to master perfectly.
Volatility is a very important component in trading.
The time frame: it is the possibility for the trader to appreciate the price fluctuations on his platform according to a variable time representation (in general 1min, 5mins, 15 min, 30 min, 1H, 2H, 1 Day (Daily); 1 Week (Weekly), ! Monthly. It is recommended to check different time horizons before any decision and according to these objectives (short or long term position), as they can give sometimes contradictory information on trends.
Volatility: This is the measure of the amplitude of price fluctuation.
The Margin: this is the coverage required by the broker, calculated according to the leverage applied to the account. Simpler, it is what you need on the account in relation to the value of the contract.
Example: The contract value EUR/USD is 1,000,000 Euros. With a leverage of 100, the transaction will represent 1 percent of the contract size. Therefore, with an account of only EUR 200, you will only be able to take a position of 0.1 on Mini, which is equivalent to leveraging EUR 100 on the account. This is too dangerous because if the price fluctuates by more than 100 points, you will end up at zero and good to fund the account again.
Margin Call: When your account is in a loss position and approaches 30 percent of remaining coverage, it is in “Margin Call“. Usually, at this stage, your broker will contact you by phone or email to offer to fund the account quickly or to wait and hope for a turnaround. A margin call is often very worrying, as it means that you have completely misread the trend, that you have not taken any precautions to stop the losses, and that your account is not large enough to support the trades you have made. So, Margin Call = all wrong.
The Bid Price: purchase price.
The Ask Price: Selling price.
The Spread: the difference between the Ask price and the Bid price, which you pay to your broker at the opening of the position (his fees).
The Swap: fees for day care or carrying from one day to the next.
The Automatic Sweep: conversion of the payment currency into your currency. Some brokers do it on demand, others do it systematically at the end of each day. The gains can therefore vary according to the exchange rate fluctuations. You should check with your broker.
The Leverage Effect: Allows you to trade more capital than you own.
Example: with a capital of 5000 euros :
A Leverage of 1:100
means that the trading possibility increases from 5000 euros to 500,000 euros.
ONE contract (one lot) forex= 100,000 currency unit.
With a leverage of 1:500, if you trade a contract of 100,000 units, the margin call will be equal to 100,000/500=200 units.
In percent: 200/100,000=0.002 or 2 percent.
Pip: Pip is an acronym for “price interest point” (swap point). The Pip is a unit of measurement used in the foreign exchange market to assess the difference between two currencies. When the EUR/USD (the Euro against the Dollar) is trading at 1.2650 and resells at 1.2654, the difference (or spread) of 4 tenths of a thousandths of that currency is translated into market terms by 4 pips.
Below is a clear chart to keep in mind the value of the Pip (or point).
Consider EUR/USD at a price of 1.3212 for example:
|STANDARD CFD||1 LOT= 100 K||Difference|
|1,3212 X 1000,000=132,120,00||Each Pip = 10 USD|
|1,3213 X 1000,000=132,130,00|
|MINI CFD||1 LOT = 10 K|
|1,3212 X 10,000=13,212,00|
|1,3213 X 10,000=13,213,00||Each Pip= 1 USD|
|MICRO CFD||1 LOT= 1 K|
|1,3212 X 1000=1321,201,3213 X 1000= 1321,30||Each Pip= 0.1 USD|
Here is now the list of and the names of the most frequently traded currencies:
AED Dirham of the United Arab Emirates
AUD Australian Dollar
CAD Canadian Dollar
CZK Czech Crown
DKK Danish Krone
GBP British Pound Sterling
HUF Hungarian Florint
ILS Israeli Shekel
JPY Japanese Yen
KEW Korean Won
KWD Kuwaiti Dinar
MXN Mexican Peso
PLN Polish Zloty
NOK Norwegian Krone
NZD New Zealand Dollar
HRH Riyal of Saudi Arabia
SEK Swedish Crown
SGD Singapore Crown
THB Thai Baht
TRI Turkish Lira
USD US Dollar
ZAR South African Rand
85 per cent or more of global transactions involve pairs known as “majors“, i.e. : EUR, USD, JPY, CHF, CAD, GBP and AUD. The others are called “Exotics” and have much wider spreads and are therefore riskier to trade or require large accounts.
Depending on the size of the spread and the value of the pip, the most interesting pairs to trade are : EUR/USD, GBP/USD, USD/JPY, USD/CAD, AUD/USD, EUR/JPY, EUR/GBP.
The payment currency is the currency to the right of the pair. In the EUR/USD pair, the payment currency will therefore be the US dollar (hence the automatic sweep).
The value of a PIp will be different depending on the currency of payment:
XXX/USD value of a Pip=7,58 Euros
XXX/JPY value of a Pip=9,32 Euros
XXX/GBP value of a Pip=12,21 Euros
XXX/CAD value of a Pip=7,70 Euros
XXX/CHF value of a Pip= 8,32 Euros
XXX/NZD value of a Pip= 6,16 Euros
Here are also the definitions of the different types of trading:
Scalping: consists of taking positions and keeping them for only a few minutes or seconds. The size of the positions must be relatively large in order to earn a good income from small variations. Scalping can be very dangerous because you can lose or gain a lot in a very short period of time.
Intraday Trading: Day traders seek to anticipate price volatility during a daily session and take a long or short position according to their own analysis criteria. The size of the positions is often larger than that of the scalpers, but with a more calculated risk.
Swing Trading: Swing traders take “heavier” positions for several days or weeks. Their financial base is stronger, allowing them to absorb adverse short-term fluctuations, notably by paying margin calls to hold a position until the end. With patience, these positions can be very profitable.