Investopedia Counterparty
One of the participants in a transaction.
Sell Quote
The sell quote is displayed on the left and is the price at which you can sell the base currency. It is also referred to as the bid price. For example, if the EUR/USD quotes 1.3200/03, you can sell 1 Euro for US$1.3200.
Buy Quote
The buy quote is displayed on the right and is the price at which you can buy the base currency. It is also referred to as the ask or offer price. For example, if the EUR/USD quotes 1.3200/03, you can buy 1 Euro for US$1.3203.
Pip
The smallest price increment a currency can make. Also known as points. For example, 1 pip = 0.0001 for EUR/USD, or 0.01 for USD/JPY.
Pip Value
The value of a pip. Pip value can be fixed or variable. To calculate the pip value, divide 1 pip by the exchange rate, and multiply it by the lot size.
e.g. 1 pip EUR/USD = 0.0001 / exchange rate (1.2900) * 100,000 = 7.75 EUR. To convert back to USD, simply multiply it by the EUR/USD exchange rate. 7.75 * 1.2900 = $10 per pip.
1 pip USD/JPY = 0.01 / exchange rate (118.00) * 100,000 = $8.47 per pip.
Lot
The standard unit size of a transaction. Typically, one "standard" lot is equal to 100,000 units of the base currency, or 10,000 units if it's a "mini" lot, and even 1,000 units if it's a "micro" lot. Some dealers offer the ability to trade in any unit size, down to as little as 1 unit!
Spread
The difference between the sell quote and the buy quote or the bid and offer price. For example, if EUR/USD quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread.
Standard Account
Trading with standard lot sizes
Mini Account
Trading with mini lot sizes
Margin
The deposit required to open or maintain a position. A 1% margin requirement allows you to control a $100,000 position with a $1,000 margin deposit.
Leverage
The extent to which you are using borrowed funds. To calculate leverage, divide your total open positions by your account equity to get the leverage ratio. e.g. If a trader has $1,000 in his account and opens a $100,000 position, he is using 100:1 leverage. If he opens a $200,000 position with $1,000 in his account, he is using 200:1 leverage.
Understanding leverage Part I
Understanding leverage Part II
Manual Execution
An order which is executed by dealer intervention.
Automatic Execution
The order is executed by computer software without human intervention or involvement.
Slippage
The difference between the order price and the executed price.
Long Position
A position in which the trader profits from an increase in price. Buy low, sell high.
Short Position
A position in which the trader profits from a decrease in price. Sell high, buy low.
Drawdown
The extent to which equity is lost in a trading account from a trade or series of trades, measured from peak to subsequent trough, most commonly in percentage terms.
Common Order Types
Market Order
An order to buy or sell at the current market price.
Limit Order
An order to buy or sell at a specified level.
Stop-Loss Order
An order to restrict losses at a specified level.
Limit Entry Order
An order to buy below the market or sell above the market at a specified level, believing that the price will reverse direction from that point.
Stop-Entry Order
An order to buy above the market or sell below the market at a specified level, believing that the price will continue in the same direction.
Trading Styles
Scalping
A style of trading that involves frequent trading seeking small gains over a very period of time. Trades can last from seconds to minutes.
Day Trading
A style of trading that involves multiple trades on an intra-day basis. Trades can last from minutes to hours.
Swing Trading
A style of trading that involves seeking to profit from short to medium term swings in trend. Trades can last from hours to days.
Position Trading
A style of trading that involves taking a longer term position that reflects a longer term outlook. Trades can last from weeks to months.
Discretionary Trading
A style of trading that involves the human decision making process for every trade.
Automated Trading
A style of trading that involves neither human decision making or involvement, whereby a pre-programmed trading strategy is automatically executed by computer software.
Example Transaction
Assume you have a trading account of $25,000 and you are trading with a 1% margin requirement. The current quote for EUR/USD is 1.3225/28 and you place a market order to buy 1 standard lot of 100,000 Euros at 1.3228, expecting the euro to strengthen against the dollar. At the same time you place a limit order at 1.3278, 50 pips above your order price.
The notional value of this transaction is $132,280 (100,000 units * $1.3228). Your required margin deposit is 1% of the total, which means you need $1322.80 account equity for this trade.
As you expected, the Euro strengthens against the dollar and your limit order is reached at 1.3278. The position is closed. Your total profit for this trade is $500 (each pip being worth $10).
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