What is? Some Forex Definitions |
Pip: This is usually the smallest part of the currency being traded, and meant as the smallest movement the currency can make. It is actually difficult to mention the currency’s last decimal place when quoting since they often go beyond the tiniest currency unit, and that there are just so many currencies being traded. In other words, US$0.01 is a cent, but what will you call US$0.0001 or JPY0.001 for that matter? Better to name every currency’s smallest traded value as something else recognizable every time. Hence the pip!
Lot: A lot is only a defined amount of a traded currency. For example, the normal lot for trading the dollar is $100,000, but there is also a mini-lot, $10,000. Since currency movement is measured in pips, a very small amount individually, a large amount of the currency is needed to feel the movement. Thus a mini-lot moving one pip will mean only a dollar lost or gained, and a normal lot makes only $10.00 either way.
Leverage: This is the amount of currency a trader can use while investing only a percentage of the total. Forex trading usually has a leverage of 100:1, meaning a player can trade $100.00 by paying only $1.00 in his account. Some Forex trading firms offer leverages of 50:1, 200:1, and even 400:1 on certain terms and conditions, and if the player has proved very reliable. If you wish to enter Forex trading, look for the house that offers good leverage, but look at the fine print very carefully and thoroughly.
Margin call: A margin is the amount of currency actually invested in a leveraged position. Thus in a 100:1 leverage, 100 is the leverage, and 1 is the margin. Forex brokers set different margin limits, and if your equity or amount in the account ever drops below the limit, you will need to decide whether to risk your money or not.
Many brokers require a greater amount of equity for the weekend, double or even triple the weekday limits, because the trading might move suddenly while the money-shops (banks and other sources of cash) are closed. A small equity will put them in an unenviable sweaty position for two days.
Be sure you and your broker see eye to eye on the subject of weekday and weekend margins.
I will stress again therefore the importance of understanding completely the policies that your broker adapts as regards to margins, and the way they describe it. Some brokers will give you a ratio while others will quote a percentage.
About the author: Finance Mansion
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