FAQ

Before trading currencies, you should understand the basic terminology
of the forex market, including how to interpret forex quotes and calculations.

 

 

BASIC TERMS

 

 

Pips

ProTrade Markets quotes currency pairs by the following decimal places – these are known as fractional pips or pipettes.

On a 5 decimal place currency pair a pip is 0.00010

On a 3 decimal place currency pair a pip is 0.010

On a 2 decimal place currency pair a pip is 0.10

For example: If GBP/USD moves from 1.55742 to 1.55762, that .00020 USD move higher is one pip.

Spread

The spread is the difference between the BID and the ASK price in the market quotes. The ASK price is applicable to a BUY order and the BID price is applicable to a SELL order.

ProTrade Markets operates using floating spreads, which are spreads that don’t have the same constant value. A floating spread will condense and widen as market conditions and liquidity change.

Leverage

Leverage is the ability to control a large amount of money in the forex markets.

ProTrade Markets offers a maximum leverage of 400:1 which means for every $1 that you have in your trading account; you can trade $400 on the forex market. The same principal applies to all base currencies and leverage amounts.

Leverage can exponentially increase your profits as well as your losses so it is crucial that traders take care when using leverage. The larger your position size, the larger your pip value will be and therefore, the greater the impact on your profit/loss (P/L).

Margin

Margin is the term given to the amount of money required in your account in order to open a trade.

Margin is calculated based on the current market quote of the base currency of the trader’s account vs base currency of the trader’s account, the volume requested, and the leverage level of the trader’s account.

Free or available margin is indicated in the MT4 trading terminal.

Margin may be calculated as follows: (Current Market Quote * Volume) / Leverage = $Margin Required

For example:

A trader wants to open 0.1 lot (10,000 base currency) lots of EUR/USD at the current market quote of 1.1520 and with a leverage level of 1:200.

The base currency of the account is USD.

(1.1520 * 10,000) / 200 = $57.60 required to open a 0.1 lot position

Margin Call

A margin call is a warning message that occurs when a trader’s account is running out of sufficient funds to sustain their current open positions on the market.

If the market moves against a trader’s position/s, additional funds will be requested through a “margin call”.

If there are insufficient available funds, the trader’s open positions will be closed out

If a trader’s Equity (Balance – Open Profit/Loss) falls below a specific margin level which is the amount required to support open positions, then the trader’s positions will automatically be closed.

This is calculated as follows for the MetaTrader 4 platform: Equity / Margin = x%

Hedging

Hedging refers to the opening of a new position in the opposite direction of an existing position on the same instrument.

For example: To hedge a 1 lot Buy position on EUR/USD, you would open a 1 lot Sell position on EUR/USD

No additional margin is required to hedge a position. It is important to note that one cannot open a new position on an account with insufficient usable margin.

Rollovers/Overnight Swaps

Forex trading may also generate interest income as well as capital gains. Since forex is traded in pairs, every trade involves not only two different currencies, but their two different interest rates.

If the interest rate of the currency a trader bought is higher than the interest rate of the currency a trader sold, then the trader will earn interest or “rollover” (positive roll).

If the interest rate on the currency the trader bought is lower than the interest rate on the currency you sold, then the trader will pay rollover (negative roll).

Rollovers/swaps can add a significant extra cost or profit to a trade. The rollover amount increases/decreases as the position size increases/decreases.

Rollovers take place at 5pm EST (New York Time)

Commissions

These are fees that ProTrade Markets charges on the Executive account only.

US$8 per 1 standard lot (100,000 of base currency) Round turn means that commission is only paid when positions are closed

Expert Advisor (EA)

EA’s are algorithmic programs that have been developed to open trades on behalf of investors on the MetaTrader 4 platform. Expert Advisors are based on signals generated by various technical indicators and may be acquired online.

Virtual Private Server (VPS)

A VPS is used to keep the MetaTrader 4 platform running even if the trader exits the program. This minimizes the chance of system downtime due to technology and connectivity failures.

MAM/PAMM Accounts

Multi Account Manager account types on the Meta-Trader 4 platform are designed for Money Managers who trade on behalf of other investors and manage multiple accounts from a single interface. Money Managers can also manage multiple accounts by utilising Expert Advisors (EAs).

One-Click-Trading

Allows you to open a new position with just one click.

 

 

FOREX GLOSSARY

 

 

Bar Chart 

A type of chart which consists of four significant points: the high and the low prices, which form the vertical bar, the opening price, which is marked with a little horizontal line to the left of the bar, and the closing price, which is marked with a little horizontal line of the right of the bar.

Broker 

An agent who handles investors’ orders to buy and sell currency. For this service, a commission is charged which, depending upon the broker and the amount of the transaction, may or may not be negotiated. On Forex a broker is a company which render accessible to trade platform i.e. ProTrade Markets.

Candlestick Chart 

A chart that indicates the trading range for the day as well as the opening and closing price. If the open price is higher than the close price, the rectangle between the open and close price is shaded. If the close price is higher than the open price, that area of the chart is not shaded.

Chart 

The graphic representation of changing price.

Close 

The last price (from the last minute, hour, day).

Closed Position 

The process to close a position is to sell or buy a certain amount of currency to offset an equal amount of the open position. This will ‘square’ the position.

Demo 

On forex the term means the trading account connected to the platform, that enables you to make transactions but only on virtual money. It was made to give people free practice.

Forward

A deal that will commence at an agreed date in the future.

Hedging 

A hedging transaction is a purchase or sale of a financial product, having as its purpose the elimination of loss arising from price fluctuations. With regards to currency transactions it would protect one against fluctuations in the foreign exchange rate.

High/Low 

Usually the highest traded price and the lowest traded price for the underlying instrument for the current trading day.

Leverage 

The use of borrowed funds at a fixed rate of interest in an effort to boost the rate of return from an investment. Increased leverage causes the risk and return on an investment to also increase.

Limit Order 

An order to buy at or below a specified price or to sell at or above a specified price.

Lot 

For general equities, this refers to a block or a portion of a trade (a unit of trading). In the context of the futures market, this is another name for a contract. For real estate, this refers to a parcel or tract of land having set boundaries.

Open Position 

Any deal which has not been settled by physical payment or reversed by an equal and opposite deal for the same value date.

Order 

An instruction to execute a trade at a specified rate.

Pip (or Points) 

The term used in currency market to represent the smallest incremental move an exchange rate can make.

Platform 

Software enabling trading on forex market. It is a interface, thanks to it via the internet we can make transactions.

Position 

An investor’s commitment in a security or market. To take a long position in a stock, you buy shares. To take a short position, you sell shares. Price – temporary rate level that is divided into ‘sell’ price and ‘buy’ price.

Rate of exchange 

The amount of currency of one nation that may be purchased on a specific date with a specified amount of the currency of another nation.

Spot 

A transaction that occurs immediately, but the funds will usually change hands within two days after deal is struck.

Spread 

The difference between the bid and offer (ask) prices; used to measure market liquidity. Narrower spreads usually signify high liquidity.

Stop Loss Order 

An order to buy or sell at the market when a particular price is reached, either above or below the price that prevailed when the order was given.

Trend 

Simply the direction of the market, usually broken down to three categories: major, intermediate and short-term trends. Three directions are also associated with a trend; that is, up trend, downtrend, and a sideways trend.

 

 

HISTORY OF FOREX

 

 

There were two monetary standards – the so-called “gold standard” used in countries like Great Britain and bimetallism used in the United States and in countries belonging to the Latin Coin Union. However, the disadvantages of bimetallism caused the gradual spreading of gold currency. As part of the gold standard, notes could be exchanged for an appropriate amount of gold on the client’s request to the central bank of a particular country.

World War I was the end of this type of exchange as people came back to exchange notes for metal, nevertheless, in a limited way. That is why notes weren’t exchanged for gold coins but for bullions (the gold bullion standard) or for other currency that could be exchanged for gold (gold exchange standard).

The definitive end of exchange and metal currency was brought by the Great Depression 1929-1933. In 1944 at the conference in Bretton Woods in the United States, the International Monetary Fund – the organization designed to stabilize the international monetary system – was founded.

The system that was established in the strength of resolutions form the Bretton Woods conference was called the “dollar standard” and was aimed at mutual currency interchangeability according to a constant rate of exchange with 1% tolerance. It was necessary to define currency value in gold but it wasn’t necessary to exchange it for gold.

Most of western European currencies reached full interchangeability in 1958. The system was used till the beginning of 1970s when it was abolished releasing currency rates, which was then regulated only by forces of demand and supply.

It was with few or no restrictions, currency exchange rates began to change fluently and this created many investing and speculating possibilities Over the next 30 years, currency exchange turnover expanded significantly. Daily turnover soon reached 5 billion dollars and then reached 600 billion dollars in 1987 to become more than 1 trillion dollars in 1992, finally reaching around $1.2 trillion daily.

Such dynamic growth was caused by many factors.

The most important were: technological development, growing incomes of central banks and bigger rivalry on imports and exports. The development and the use of the Internet and computers in trading caused higher interest in not only forex but also others capital markets.

We can see that the Forex market is very young – about 30 years old – and this means that it is one of the youngest capital markets. It can be perceived as a paradox that forex although is so young and at the same time the biggest and the most popular of markets nowadays.