The unit of measurement to express the change in value between two currencies is called a pip.For example, if EUR/USD rises from 1.2250 to 1.2251, it moves a pip. In Forex, a pip is usually the last decimal place of a quotation.
Spreads are the difference between the bid prices and the ask prices. The smaller the spreads, the lower the transaction costs.The impact of spreads on the performance of medium-term or long-term investors are limited but the impact on the performance of short-term investors are larger. For example, the ask for EURUSD is 1.4390 and the bid is 1.4393. If you are aoing to buy EURUSD, the execution price is 1.4393. If you are going to close the trade immediately, you will sell EURUSD at 1.4390. Therefore, it incurs 3 pips loss. This is the transaction cost.
Value for one pip. Please refer to Forex calculation
Margin is a good faith deposit that a trader puts up for collateral to hold open a position.
Margin=lots* contract size/ leverage
Margin for gold and silver= lot* contract size* market price/ leverage
The margin for CFD is fixed.
Free margin =Free balance- margin- spreads
Regulated by the clearing house, when the balance in the trading account falls, it's required to add the variation margin to avoid the balance falls below the margin.
Contract size is the amount transacted. For example, in FX, 1 contract size is $100,000. In other words, when trading one lot in a standard account, a trader is essentially placing a $100,000 trade in the market.
STP is to transfer the order directly to liquidity providers without manually settled by the dealing desk. Therefore, the bid and ask prices are quoted by the liquidity providers.
Three key facts about STP Brokers
ECN brokers transfer the orders to the liquidity pool, where major banks and financial institutions are main players. STP brokers will have their own internal liquidity pool. The signed liquidity providers will provide liquidity in this pool and hence the best price for the orders transacted. The better the liquidity, the lower the spreads.
Spreads are fixed. If the STP broker has only one liquidity provider, this liquidity provider is the only counterparty. Therefore, this liquidity provider has the discretion of the bid and asks prices.
Floating spreads: The STP brokers aggregate a list of all the best bid and ask prices from the signed liquidity providers and match trades with the best possible prices from them.
3) Instant Execution or Market Execution
Instant execution refers to the order does not go to the market but processed by the broker.
Market Execution refers to the order information is sent to the market, and the price is determined by the liquidity provider in the market.
STP brokers with market price execution provide real direct market entry DMA to customers (Direct Market Access).
ECN is the abbreviation of Electronic Communication Network. Orders from the clients are booked in the Network anonymously. All the bid and ask prices reflects the real time demand and supply in the market from all of the parties.
Broadly, ECN is bridged by STP. The advantage of ECN is the fairness.
ECN broker passes clients’ order through to liquidity providers or the interbank market, meaning the trades are actually being matched with other traders in the real market. And the broker makes money on the spreads. Besides, ECN aggregates a considerable amount of liquidity provider. In order to get more orders, the liquidity providers in the network would intend to lower the spreads and accelerate the process to execute the orders. However, the requirements for funds, the contract size and the trading volume are higher for ECN accounts, which are more suitable for institutional investors with significant capital.
EA is the abbreviation of Expert Advisor. The computer automatically execute the trades according to the strategies programmed by the traders. The EA strategies are made up of the order execution, risk management and position management.
The EA strategies are usually coded in programming language, like MQL,JAVA or C++. Via the programe, the computer can automatically buy and sell according to the set conditions.
The strategies include:1. Entry levels; 2. Conditions of holding positions 3. position management 4. exit levels. Traders can program their own strategies into EA and improve the trading performance by back testing and adjusting the parameters. Computer reacts quickly than human being. Therefore, it improves the performance when there is a fleeting opportunity.
EA strategy is an essential factor for the success of the EA.There are full automatic EA and semi-automatic EA.Full automatic EA is fully reliance on computer execution, but the semi automatic EA still involves manual execution.
Market maker stands ready to buy and sell FX on a regular and continuous basis. They are the counterparty of clients' trades. Market maker boosts the liquidity by taking the both sides of order, hoping to make a profit on the bid-ask spreads.
Essentially, the inbalance between the demand and supply brings the need for market makers.The buyers and sellers cannot always match with needs with each other.As a middle man, market makers take the order flow first and manage the position later to solve out the mismatch of orders.
1) Profits from the bid-ask spreads
2) Market makers quote the bid and ask prices and take the orders passively. Therefore, they can smooth out the market volatility
3) When the liquidity is light, market makers would hedge their position to manage the inventory risk.
4) It’s market makers’ responsibility to quote the clients with a reasonable spread when requested
5) When there is no liquidity in the market, market makers are still required to quote and make transactions happen.
Bid is the price to buy a currency pair. For example, for quotation USD/CHF 1.4527/32, the bid price is 1.4527, meaning that one USD can be bought by selling 1.4527 CHF. Ask is the price to sell a currency pair. The ask price is 1.4532 in the example above, that is, you can buy 1.4532 Swiss francs for $ 1. Foreign exchange selling price is also called selling exchange rate.
A spread is the difference between the bid and the ask price of a security or asset.
It's common that the quotation only has two digits in FX. If the price difference between bid and ask are larger than 100, there will be three digits. For example, EUR/USD 1.2604/07 GBP/USD 1.5089/94 CHF/JPY 84.40/45
Liquidity describes the degree to which an security can be quickly bought or sold in the market without affecting the asset's price. The better the liquidity, the lower the trading cost. There are few indicators for the market liquidity. - Market depth: It is the amount that will be traded for a limit order with a given price.
FX trading involves purchasing a currency and selling another currency simultaneously. Swap is the interest rate difference between these two currencies and it incurred when the contracts are rollover. When investors purchase high yield currency and sell lower yield currency, it incurs positive swaps for investors and vice versa. Since the contract is settled in T+2,the swap is calculated according to the T+2 rules.
Scalping is a term used to denote the "skimming" of small profits on a regular basis, by going in and out of positions several times per day. The purpose of scalping is to make a profit by buying or selling currencies and holding the position for a very short time and closing it for a small profit. Scalping strategy is usually based on a set of signals derived from technical analysis charting tools.
PAMM is a form of pooled money forex trading. An investor allocates his or her money in desired proportion to the qualified fund manager's PAMM account, expecting to earn profits via money manager's skills and expertise. The fund managers will receive commission from part of the earnings.
MAM is a trading software solution that allows the simultaneous viewing, trading and tracking of multiple accounts. This is key for professional traders or fund managers who may need to trade multiple accounts simultaneously with a single order at the same price.
LAMM is the predecessor of PAMM. LAMM is also widely used by professional traders or fund managers to manage a pool of fund from different investors. The fund managers have to trade multiple accounts. When they buy one standard lot of a currency, each of the customers' accounts will also be increased with a standard lot of the currency, regardless of the relative size of the customer’s account.
The netted total exposure in a given currency.
Investors think the market will go down so they sell the currency at market price and wait to buy back when market falls down.
Investors think the market will go up so they buy the currency at market price and wait to sell when the market rises.
Netted position or no position.
A hedge is an investment to reduce the risk of adverse price movements. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
An order placed with the broker to close the position when it reaches a specific price in the market. The intention is to limit the amount of loss made.
An order placed to close the position when it reaches the profit target. The intention is to try to maximize the profit.
The range of a financail instrument price movement in a period of time
When the markets move within a relatively tight range for a certain period of time.
Long term: time frame longer than one month Medium term: time frame between a week and a month Short term: time frame from one day to one week
A bull market is a market extends to rise. A bear market is a market with extending downtrend.
In thin market, the liquidity is low and there is no much volatility.
Market has a clear and extending trend. It might be caused by some essential news.
Price is moving in a small range without clear direction.
A technical correction is a decrease in the market price of an asset or entire market after extensive price increases.
When the price falls to a certain level, the price range starts to shrink.
The price moves above or below the key levels.
A false breakout is when price temporarily moves above or below a key support or resistance level, but then later retreats back to the same side as it started.
Resistance level is the level where the upward price movement is impeded by an overwhelming level of supply accumulated.
Support level is the level where the downward price movement is impeded by an overwhelming level of demand accumulated.
Panic selling refers to wide-scale selling of an investment, causing a sharp decline in price. In most instances of panic selling, investors just want to get out of the investment, with little regard for the price at which they sell.
Intraday reversal happens when market reverses the trend within a day.
Short squeeze is to force the short seller to buy back the securities and clear their short position. When the market is pushed too high, the short seller might not be able to afford the margin or the lending cost. Hence, they ar forced to close their position.
Holding same-size long and short open positions at the same time.
A GTC order remains active in the market until you decide to cancel it. Your broker will not cancel the order at any time.
A buy limit is used to by below the market and a sell limit is used to sell above the market.
Orders are traded on the market. They are usually settled in T+2.
Renew the contract to the next delivery day and adjust for the interest rate difference.
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