Important Forex Trading Terminology
- cross rate – Currency exchange rate between two currencies that are each not the official currency of the country in which the exchange rate quote is given.
- exchange rate – The value of one currency in terms of another. For example, a EUR/USD exchange rate of 1.3200 means 1 Euro is worth 1.3200 in U.S. dollars.
- pip – The smallest increment of price change a currency can make. For example, one pip for the USD/JPY is 0.01.
- margin – The deposit required to open or maintain a position. Can either be “free” or “used”: used margin is the deposit amount being used to maintain an open position, and free margin is the deposit amount available to open a new position. If a trader’s account falls below the margin required to maintain an open position, a “margin call” will be made requiring him or her to either add money into the account or close the position. Most brokers will automatically close the position if this occurs. The margin amount depends on the broker; it could be half of the original margin required to open the position.
- leverage – The ability to put your account into a trading position greater than your total account margin (see previous term). For example, if a trader has a total account margin of $1,000 and he/she opens a $100,000 position, he leverages his account by 100 or by 100:1. To calculate leverage used, do this simple equation:
- spread – The difference between the sell quote and the buy quote, or the bid and the offer price. For instance, if your EUR/USD quote is 1.3200/1.3203, the spread is the difference between these two numbers, which is 3 pips.
- lot – How much of a currency a trader is trading. There are three main lot amounts representing different increments. They are:
- Standard: 100,000
- Mini: 10,000
- Micro: 1,000
For example, a trader wanting to enter a trade buying 60,000 EUR/USD would be entering 6 mini lots (6 times 10,000 equals 60,000).
- rollover – The amount of interest you will either be credited or debted on any trades still open at the end of the trading day. The rollover payment amount is calculated from the interest rates of each currency in the pair you’re trading. Each broker sets a different time for the end of the trading day, so be sure to check with yours.
Also sometimes used to refer to currency quotes not involving the U.S. dollar, given in any country.