In this guide we have collected all the concepts you need to know before getting closer to the world of forex trading. These are technical but basic definitions, which you will need to know if you want to invest correctly in the currency market.
Take your time to delve into them, perhaps by taking a forex trading course or learning in the field by practicing with a forex demo account.
Forex margin and leverage
Leverage is a money lending mechanism that amplifies the investor’s trading capital.
The return on capital will be increased by the leverage effect guaranteed by the brokerage companies, while the maximum loss is the invested capital.
Margin is a deposit that the investor (trader) must keep in his account in order to continue operating on the market. It is a guarantee for the broker against potential losses.
Guarantee Margin: Allows traders to take leverage positions with a fraction of the capital needed to fund transactions. In stock markets, the allowed margin is usually 50%, which means that the buyer has double his real purchasing power.
In the Forex market, leverage usually varies between 1% and 2%, depending on the brokers and the risks they are willing to take.
What short and long mean
Going long will mean buying the first currency of the pair and selling the second at the same time, going short will mean selling the first currency and buying the second of the pair.
The concept is quite simple, a little less understanding in reality how to behave. Let’s take a practical example just to clarify.
In the event that market analyzes predict a future strengthening of the Euro, the most logical action will be to buy Euros, right? In that case we will go long waiting for the future strengthening of the currency.
If, on the other hand, the analyzes speak of a probable strengthening of the US dollar, it will be obvious to sell Euros and buy dollars. We will therefore go short on the EUR / USD pair taken as an example.
Once this is understood, it will be easier to enter this market, basically long and short are the two actions that will allow the investor to speculate and therefore earn on the purchase and sale of currencies.
Spread: meaning
Also in this case the concept will seem difficult, but only at the beginning. To put it simply:
The spread is the difference between the buy and sell price of a given pair.
In fact, by opening a position you will notice that it will not be in a breakeven position, as you would expect, but in reality it will be a few pips below the purchase price.
So if we had the opportunity to immediately close the position in question we would find ourselves with a small loss. It is precisely the spread.
All this will be even clearer by observing the bid values, the buy and ask cost, the selling price of a given currency. These will never be identical.
What is the Pip?
Let’s immediately clarify what we are talking about when we refer to the Pip already mentioned: it is that very slight possible variation present in the exchange rate of two currencies in pairs.
The Pip is the smallest swing that moving prices can make. To operate well on the forex market, you need to be able to calculate your losses and gains following an investment.
Also in this the Foreign Exchange system is very simple: it depends on the open position and the number of lost or gained pips.
Stop loss and Take Profit
Finally we close the discussion with the stop loss and take profit, two tools that it is good to learn to handle with dexterity. These will save your assets when you decide to invest in particularly volatile markets or when you cannot stand in front of your forex trader station.
With the stop loss it is possible to set a loss margin at which the position will be closed directly from the platform. Set this level and remember not to change it, it could be your luck.
The take profit is different, although conceptually very similar to the stop loss. The tool will set a profit margin at which the operation will be closed. This will allow the investor to collect what he had set and to focus on other positions.
