There’s a lot to learn when it comes to trading, and all the complicated terminology certainly doesn’t help. Here are a few essentials to help you get started.
Pips
You might have noticed that currency pairs are usually shown to four decimal places. The pip is the 4th digit shown. So, if the price goes up by 0.0001 then the price has gone up 1 pip. The only time this doesn’t apply is for the Japanese yen (JPY), where the pip is the 2nd digit.
Lots
A lot represents the volume of currency being traded. One lot is equal to 100,000 units of the currency. So, one lot of EUR is 100,000 euros. This might seem like a lot, but don’t worry, it’s not the only option available. There are also mini lots (10,000 units), micro lots (1,000 units) and nano lots (100 units).
Spreads
When you trade you will see two currency prices: the bid price and the ask price. The bid price is the price you can sell at, the ask price is the price you can buy at. The difference between the two prices is known as the spread. Spreads can be either fixed or variable, depending on your broker.
Leverage
Leverage trading is a service offered by brokers that allows you to trade large volumes using smaller amounts of capital. For example, if you want to trade $200 with a leverage of 2:1 you will only need to have 50% of the capital available to open the trade i.e. $100. The remaining money is lent to you by your broker.
Margin
Margin is the amount of money you need to have in your account in order to make a leveraged trade. In the example above, you can see that you need $100 available in your account to place a $200 trade with a leverage of 1:2. Your required margin in this example would be $100.
Looking for more information about forex trading? Check out our education section.
