It is the quotation of one currency unit against another currency unit. For example, the euro and the US dollar together make up the currency pair EUR/USD
. The first currency (in our case, the euro) is the base currency
, and the second (the US dollar) is the quote currency
. As you see, we use short forms for currencies: euro is EUR, US dollar is USD, and Japanese yen is JPY. Exchange Rate
It is the rate at which you exchange one currency for another. The exchange rate shows you how much of the quote currency you need if you want to buy 1 unit of the base currency.
Example: EUR/USD = 1.3354. This means that 1 euro (the base currency) is equal to 1.3354 US dollars (the quote currency).
Now take a quick peek at how the euro is doing against the Japanese yen: for 1 euro I can get 106.53 Japanese yen (i.e. EUR/JPY=106.53). Maybe I'll wait until the euro gets stronger before I exchange it and fly to Tokyo again.
The exchange rate may change in 2 days or 1 week, though. It may even stabilize for a while. Okay, but when? If you're a time freak like me, the when is important to you, too. Quote
It is a market price that always consists of 2 figures: the first figure is the bid/selling price, and the second is the ask/buying price. (e.g. 1.23458/1.12347). Ask Price
Also known as the offer price
, the ask price is the price visible on the right-hand side of a quote. This is the price at which you can buy the base currency
For example, if the quote on the EUR/USD currency pair is 1.1965/67, it means that you can buy 1 euro for 1.1967 US dollars. Bid Price
It is the price at which you can sell a currency pair.
For example, if the EUR/USD is quoted at 1.4568/1.4570, the first figure is the bid price at which you can sell the currency pair. Bid
is always lower than ask
. And the difference between bid and ask is the spread
It is the difference in pips between the ask price and the bid price. The spread represents the brokerage service costs and replaces transaction fees.
There are fixed spreads
spreads. Fixed spreads maintain the same number of pips between the ask
price, and are not affected by market changes. Variable spreads fluctuate (i.e. increase or decrease) according to the liquidity of the market. Account Currency
It is the currency you choose when you open a trading account with XM. All your profits and losses will be converted into that particular currency.
At XM you can open any kind of trading account you prefer with many base currency options: USD, EUR, GBP, JPY, CHF, AUD, HUF, PLN, or RUB.
So if you open an account in USD but you transfer funds in EUR, the funds will be automatically converted into USD at the prevailing inter-bank price. Pip
A pip is the smallest price change of a given exchange rate.
Are you a visual type? Here's an example: if the currency pair EUR/USD moves from 1.2550
, that's a 1 pip movement; or a move from 1.2550
is a 5 pip movement. As you see, the pip is the last decimal point.
All currency pairs have 4 decimal points – the Japanese yen is the odd one out
. Pairs that include JPY only have 2 decimal points (e.g. USD/JPY=86.51).
Forex is traded in amounts called lots.One standard lot> has 100,000 units of the base currency, while a micro lot has 1,000 units.
For example, if you buy 1 standard lot of EUR/USD at 1.3125, you buy 100,000 Euros and you sell 131,250 US dollars. Similarly, when you sell 1 micro lot of EUR/USD at 1.3120, you sell 1,000 Euros and you buy 1,312. US dollars. Pip Value
The pip value shows how much 1 pip is worth. The pip value changes in parallel with market movements. So it is good to keep an eye on the currency pair(s) you are trading and how the market changes.
Now let's reflect on what you have learnt about pips! To benefit from pips and see significant a increase/decrease in profit, you will need to trade larger amounts. Suppose your account currency is USD and you choose to trade 1 standard lot of USD/JPY. How much is 1 pip worth per $100,000 on the USD/JPY currency pair?
Margin is the minimum amount of funds, expressed as a percentage, that you will need if you want to open a position
and keep your positions open. Leverage
Strictly speaking, through leverage the forex broker lends
you money so that you can trade bigger lots Equity
It is the total amount of money in your trading account, including your profit and losses. For instance, if you deposited USD 10,000 into your account and you also made a profit of USD 3,000, your equity amounts to USD 13,000. Used Margin
It is the amount of money kept aside by your broker so that your current trading positions can be kept open and you don't end up with a negative balance. Free Margin
It is the amount of money in your trading account with which you can open new trading positions. Free margin = Equity – Used Margin.
This means that if your equity is USD 13,000 and your open positions require USD 2,000 margin (used margin), you are left with USD 11, 000 (free margin) available to open new positions. Margin Call
Margin calls are a major part of risk management: as soon as your Equity drops to a percentage of the margin used, your forex broker will notify you that you need to deposit more money if you want to maintain your position. At XM this percentage is 50%. Position
It is a trade that you hold open during a certain period of time.
When you enter a long position, you buy
a base currency. Supposing that you choose the EUR/USD pair. You expect the EUR to strengthen as compared to the USD, so you will buy EUR and profit from its increase in value. Short Position
When you enter a short position, you sell
a base currency. If you choose the EUR/USD pair again, but this time you expect the EUR to weaken as compared to the USD, you will sell the EUR and profit from its decrease in value.