Tuesday, 14 July 2015

Explenation of some terms used in the Forex.

As it is the case with every market there are a few terms people should know before they start investing.
I'll try to sum a few up and explain what they mean.
Feel to comment if you know of other important ones that I might forget.

1) Spread:
This is the difference between the bid prices and the asking price.
Most of the time if you open an position you are immediately in loss because of the difference in spread (this is not a problem if you have a strategy that focuses on bigger profits then smaller profits).
Almost every broker has their business model based on this spread, so they receive a part of the spread as compensation for the use of their platform, services and liquidity.

2) Pip or pips:
This means percentage in profit, in the Forex market the difference in price movements is called pip so in other word when a price moves 20 units in your favour and you shut down the positions you've earned 20 pips.
A pip measures the amount of change in the exchange rate for a currency pair. For currency pairs displayed to four decimal places, one pip is equal to 0.0001.

3)Stop loss:
Most traders use a stop loss to step out of a trade if this is a losing one.
Now I've seen the software uses a different stop loss it uses some sort of double hedge stop loss to clear the loss and have an overall profit.
Anyway stop losses can be a great tool, but allot of trader use a stop loss based on emotions, this can destroy your account because you'll close the position on the least favourable time and thus end up with a bigger loss.

This is the take profit.
You can put a profit target on your trade so you don't need to stay behind your platform in order to click for a profit.

 This is the size of a trade most small account can trade starting from 0,01the size of your trade determines the size of your profit or loss.
Depending on your trading style you can choose to either have a few smaller positions with different stop losses and take profits or you can use a single big position if you are truly convinced of the direction your pair is heading.

If you want to see some more terms get explained, feel free to comment on this blog post.

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