If you are new to forex and need some insight into the terminologies and concepts, look no further. In this article, we will take you through
What is forex?
Forex (or foreign exchange) refers broadly to the process of exchanging the currency of one country with another currency. The forex market is an industry offering products and services centering around this process.
As the value of currencies fluctuate, they can turn a profit (or loss) for forex market participants with brokers providing the services enabling this.
The forex market presents a wide range of instruments to trade on- such as commodities, indices, stocks, and cryptocurrencies. Exness offers Contract for Difference (CFDs) products that pay out the difference between the value of an instrument at the time of opening a position, and the value of the same at the time of closing a position - this is where profit and loss is derived from.
Terms you need to know
Here is an exhaustive list of terms complete with simple explanations and examples, to help you get a good understanding of how trading works.
Currency pair, Cross pairs, Base currency, and Quote currency
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Currency pair |
Two currencies of different countries combined to trade in the foreign exchange (forex) market. Example: EURUSD, NZDCAD |
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Cross pair |
A currency pair that does not contain USD. Example: EURGBP, NZDCHF |
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Base currency |
The first currency of a currency pair is called the base currency. Example: EUR is the base currency for the currency pair EURUSD. |
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Quote currency |
The second currency of a currency pair is called the quote currency. Example: USD is the quote currency for the currency pair EURUSD. |
Bid price and Ask price
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Bid price |
The price at which a broker is willing to buy the base currency in a currency pair. It is also the price at which clients sell the base currency of a currency pair. |
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Ask price |
The price at which a broker is willing to sell the base currency of a currency pair to the client. It is also the price at which clients buy the base currency of a currency pair. |
Note:
Buy orders open at Ask price and close at Bid price.
Sell orders open at Bid price and close at Ask price.
Spread
Spread is the difference between the Bid and Ask prices of a particular trading instrument. The value of spread is set in points. Both types of spread, namely dynamic and stable spread, are offered across various Exness’ account types.
You can read more about this here.
Lot and Contract size
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Lot |
A lot is the standard unit size of a transaction. Typically, one standard lot is equal to 100,000 units of the base currency. |
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Contract size |
This is a fixed value, which denotes the amount of base currency in 1 lot. For most instruments in forex, it is fixed at 100,000. |
Pip, Point, Pip size, and Pip value
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Pip |
This is the value of price change (4th decimal for most forex instruments) For example, the price change from 1.35422 to 1.35432 is 1 pip. |
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Point |
This is the minimum value of price change (5th decimal for most forex instruments. For example, the price change from 1.35432 to 1.35433 is 1 point. 1 pip = 10 points |
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Pip size |
This denotes the position of the pip in a price. For most instruments, it is 0.0001 because the pip is the 4th decimal place. |
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Pip value |
Pip value helps us determine the value of 1 pip. By doing so, we can calculate how much profit or loss a client will make if the price changes by one pip. Pip value = Pip size × Contract size × Lots |
Leverage and Margin
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Leverage |
This is the ratio of equity to loan capital. Exness offers up to 1:Unlimited leverage on some trading instruments on all accounts. |
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Margin |
This is the amount of funds in account currency, withheld by a broker, for keeping an order open. |
Note: The higher the leverage, the less the margin.
You may read more about the relationship between leverage and margin here.
Balance, Equity, and Free margin
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Balance |
The total financial result of all completed transactions and depositing/withdrawal operations on an account. It is either the amount of funds you have before you open any orders or after you close all open orders. The balance of an account does not change when trades are open. |
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Equity |
Equity = Balance +/- Profit/Loss |
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Free margin |
Free margin = Equity - Margin This is the amount of funds remaining in your account after the margin has been placed on hold. |
Profit and Loss
Profit or loss is calculated as the difference between the closing and opening prices of an order.
Profit/Loss = Difference between closing and opening prices x Pip value
Note:
- Buy orders make a profit when the price increases while Sell orders make a profit when the price decreases.
- Buy orders make a loss when the price decreases while Sell orders make a loss when the price increases.
Margin Level, Margin Call and Stop Out
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Margin Level |
Ratio of Equity to Margin, denoted as a percentage. Margin Level = (Equity / Margin) x 100% |
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Margin Call |
This is a notification sent in the trading terminal, signalling the need to deposit or close a few positions to avoid Stop Out. This notification is sent once Margin Level hits the Margin Call level set for that particular account by the broker. |
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Stop Out |
Stop Out is the automatic closure of positions when the Margin Level hits the Stop Out level set for the account by the broker. |
To find out the Margin Call and Stop Out levels for the various account types, you may refer to this article.