The world of forex is filled with unique concepts and terms. Here are some of the most common fx terms that you need to be familiar with whilst trading on the forex market:

Pips

Pip stands for percentage interest point and it is the smallest individual unit in forex trading. The pip is always the right-most digit of any forex price quote.

The exact value of an individual pip depends on the currency being traded. For example, the Euro is measured out to four decimal places, thus each pip equals 1/100th of a cent. The Yen, on the other hand, is measured out to two decimal places, thus one pip is one cent. That’s not to say that each pip is worth 1/100th of a cent in Profit – to calculate this, we need to introduce two other terms, lots and leverage.   

Lots

Banks and other liquidity providers trade currency in lots. For example, if a standard lot is 100,000 (100K) units of the currency being traded, while a mini lot is 10,000 (10K) in the forex market, then these amounts would make trading prohibitive for the average trader. As a result, forex brokers introduced a concept called leverage.

Leverage

Leverage allows forex traders to control more currency in a trade than they have deposited in their trading account. This is where the real power of fx trading lies. Therefore, trading with the leverage system wisely can work in your favor, and bring you big profits.

With 1:100 leverage, an fx trader needs 1 unit of currency to control 100 units in the forex market. Thus, it would only take 100 units to control 1 mini lot (10K) in the forex market or 1000 units to control 1 standard lot (100K).  Profit, therefore, is a factor of a forex trader's leverage X the amount and size of lots being traded X the amount of pip price moves in the trader's favor. Loss, likewise, is calculated in the same way when price moves against the trader.

For example, if a you buy 1 mini lot of the EUR/USD currency pair, then your account equity would increase or decrease by $1 for each pip of movement. If you buy 1 standard lot, then your account would increase or decrease $10 with each pip of price movement. Example 1: if the EUR/USD pair increases by 10 pips (10×$1) from 1.5000 to 1.5010 with mini lots, then this is a $10 increase. Example 2: if the EUR/USD pair increases by 10 pips (10×$10) from 1.5000 to 1.5010 with standard lots, then this is a $100 increase.

Trading on Margin

The margin is the amount of collateral required by forex traders to maintain their open positions on the forex market. Unlike stocks and commodities, there are no margin calls in forex. If an account falls below the required margin requirements, then all open positions are automatically closed. For example, if a forex trader buys one mini lot of the EUR/USD pair for 1.50 at 1:100 leverage, then they will need $150 of their account in margin to maintain that open position. If the price moves against the forex trader by one pip, then they will need $151 and if the price moves against the fx trader by 10 pips, then they will need $160.

If, on the other hand, a forex trader buys 1 standard lot of the EUR/USD pair for 1.50 at 1:100 leverage, then they will need $1500 of their account in margin to maintain that open position. If the price moves against the fx trader by one pip, then they will need $1510. Or if the price moves against them by 10 pips, then they will need $1600.

Next Article: Placing Orders