Forex Trading "jargon"

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Forex Trading "jargon"

Post  ilearn2t on Mon Dec 12, 2011 6:39 am

Hello Everyone

This thread will include A -Z words associated with forex jargon. I will try to include as much words and detailed information as possible and in words a "Newbie" might understand.

Jargon is terminology which is especially defined in relationship to a specific activity, profession, group, or event. In other words, the term covers the language used by people who work in a particular area or who have a common interest. Eg: Forex trading.

All replies below will be explained in a way “Newbies” might understand the working of this business without fully getting confused or totally put off trading altogether by terms they might not understand. Please remember never invest in a real money account until you fully understand and learn “Demo” trading first.

Newbie is a slang term for a novice or newcomer, or somebody inexperienced in any profession or activity. In a way this term could and should apply to most if not all forex traders as not many truly master it, which makes this business all the more thrilling. But now lets get down to the real business of learning, I'll try and pick out the words I think might be of importance to newcomers.

Leverage is easier explained as your broker lending you a "virtual" loan . Your broker will require $x (1%) of your margin in order to make the loan, but we don’t yet have enough information to calculate leverage, because we don’t know what our account equity is. Your broker would normally quote that as “100:1” leverage, which is not entirely accurate since our actual leverage also depends on our account equity. So regardless of what a broker’s marketing guys offer you “500:1 leverage” or “50:1 leverage” should not generally make any difference.

So Lets try to simplify it.

Your Forex broker gives you leverage of 500:1
This means you borrow 500 dollars for every dollar you have in your trading account.


or

Your Forex broker gives you leverage of 50:1
This means you borrow 50 dollars for every dollar you have in your trading account.


So in the end leverage can be double edge sword, it can help you a lot and at the same time it can also hurt you a lot. It could be your friend or enemy depending on how you use it because it can give a you higher rewards or  higher losses.

Margin can be explained simply as the leverage in the previous message is.

Opening a $20 "Demo" account at 500:1 leverage is equal to approximately 1.3% of you deposit if you place a 0.10 lot size on EURUSD as the margin will be approximately -26.73 from you’re initial deposit (2000)

Opening a $20 "Demo" account at 50:1 leverage is equal to approximately 13% of you deposit if you place a 0.10 lot size on EURUSD the margin will be approximately -267.32 from you’re initial deposit (2000)

This doesn’t change your pip value as both will open at -2.00 or -2 cents if the spread is 2.
What it does mean is you’ll place far fewer orders on a 50:1 account, as once your free margin nears zero no more trades will be allowed. So maybe a 50:1 account would be a good choice for the over eager “Newbie” on a get rich quick quest.

Stop-loss An order which closes out a market position once a certain price level trades in the market. For example, a sell order placed above the market price to protect against accelerating losses.

You can set a StopLoss anytime while you’re said order is open, and outside the minimum brokers level below the market price on Buy, BuyStop or and BuyLimit orders, or placing it at the minimum brokers level above the market price on Sell, SellStop or and SellLimit orders.

Take-Profit An order which closes out a market position once a certain price level trades in the market. For example, a buy order placed above the market price to close a winning order.

You can set a TakeProfit anytime while you’re said order is open.
By placing it at the minimum brokers level above the market price on Buy, BuyStop or and BuyLimit orders.
By placing it at the minimum brokers level below the market price on Sell, SellStop or and SellLimit orders.

Currency Pair Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency.

Base Currency The base currency is the currency in which an investor or issuer maintains its book of accounts. In forex, the US Dollar is normally considered the 'base' currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British Pound, the Euro and the Australian Dollar.

Equity The total cash value of an account, including the amount of profit or loss that would be incurred if the existing positions were liquidated at the current settlement price.

Balance The net value of an account. This could be a false reading for "newbies" as it dosen't take into account the other factors that could destroy an account.

Example:
Your initial deposit is $20 your balance shows a great $500 (this will include your deposit + all win/loss closed trades combined) but your open orders show -$510, so in effect you have only $10 remaining from your initial deposit of $20.

Good luck
ilearn2t
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