Forex Terms & Order Types

Forex Terms

The balance on your account, on the MetaTrader 4 Trading Platform shows the amount that has been deposited into your account. The balance does not reflect any open trades that you have and is thus not accurate when you want to see your current trading position.

The Equity is your real-time or actual balance. It calculates the amount in your account plus all open trades and gives you a picture of what your account is worth at that precise moment. If you were to close all your trades and withdraw your money you would get the equity amount.

Major and Minor Currencies
The eight most frequently traded currencies (USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD) are called the majors. These are the most liquid currencies with the lowest trading cost. All other currencies are known as minors or exotic currencies.

Base Currency
The base currency is the first currency in any currency pair. The currency quote shows how much the base currency is worth as measured against the second currency. For example, if the GBP/USD rate equals 1.5850, then one GBP is worth USD 1.5850. In the forex market, the U.S. dollar is normally considered the base currency for quotes, meaning that quotes are expressed as a unit of 1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British pound, the euro, and the Australian and New Zealand dollar.

Quote Currency
The quote currency is the second currency in any currency pair. This is frequently called the pip currency and any unrealized profit or loss is expressed in this currency.

A pip is the smallest unit of price for any currency. Nearly all currency pairs consist of five significant digits and most pairs have the decimal point immediately after the first digit, that is, GBP/USD equals 1.5838. In this instance, a single pip equals the smallest change in the fourth decimal place – that is, 0.0001. Therefore, if the quote currency in any pair is USD, then one pip always equal 1/100 of a cent. Notable exceptions are pairs that include the Japanese yen where a pip equals 0.01.

A pip is a term you will hear very often in the trading world. This is the unit of measurement for trades. It is used to measure the size of a movement in the market. In most currencies 1 pip translates to a 0.0001 change. I will show you an easy way to measure pips so do not let the technicality bother you too much, just remember a pip is used to measure a movement in the market e.g. The US Dollar Moved 300 Pips against the Yen today.

One-tenth of a pip. Some brokers quote fractional pips, or pipettes, for added precision in quoting rates. For example, if GBP/USD moved from 1.58156 to 1.58158, it moved 2 pipettes.

A lot is how you determine how much of your margin you use for a trade and this also plays a role in your risk. Our system calculates optimal lot size so that you do not have to calculate it manually. Therefore, a lot determines how much money you are trading per trade.

Bid Price
The bid is the price at which the market is prepared to buy a specific currency pair in the forex market. At this price, the trader can sell the base currency. It is shown on the left side of the quotation. For example, in the quote EUR/USD 1.2312/15, the bid price is 1.2312. This means you sell one British pound for 1.2312 U.S. dollars.

Ask/Offer Price
The ask/offer is the price at which the market is prepared to sell a specific currency pair in the forex market. At this price, you can buy the base currency. It is shown on the right side of the quotation. For example, in the quote GBP/USD 1.5812/15, the ask price is 1.5815. This means you can buy one euro for 1.5815 U.S. dollars. The ask price is also called the offer price.

Bid/Ask Spread
The spread is the difference between the bid and ask price. For example, the USD/JPY rate might be 118.30/118.34, but would be quoted verbally without the first three digits as “30/34.” In this example, USD/JPY has a 4-pip spread.

Quote Convention
Exchange rates in the forex market are expressed using the following format: Base currency / Quote currency = Bid / Ask

Transaction Cost
The critical characteristic of the bid/ask spread is that it is also the transaction cost for a round-turn trade. Round-turn means a buy (or sell) trade and an offsetting sell (or buy) trade of the same size in the same currency pair. For example, in the case of the EUR/USD rate of 1.2812/15, the transaction cost is three pips. The formula for calculating the transaction cost is: Transaction cost (spread) = Ask Price – Bid Price

Cross Currency
A cross currency is any pair in which neither currency is the U.S. dollar. These pairs exhibit uneven price behavior since the trader has, in effect, initiated two USD trades. For example, initiating a long (buy) EUR/GBP is equivalent to buying a EUR/USD currency pair and selling GBP/USD. Cross currency pairs frequently carry a higher transaction cost.

When you open a new trading account with a forex broker, you must deposit a minimum amount with that broker. This minimum varies from broker to broker and can be as low as R1000 to as high as $100,000. Each time you execute a new trade, a certain percentage of the account balance in the account will be set aside as the initial margin requirement for the new trade based upon the underlying currency pair, its current price, and the number of units (or lots) traded. The lot size always refers to the base currency. For example, if your account provides a 100:1 leverage or 1% margin. Let’s say one mini lot equals $10,000. If you were to open one mini-lot, instead of having to provide the full $10,000, you would only need $100 ($10,000 x 1% = $100).

Used Margin is the amount of money that you have used to trade. Available Margin is the money that you still have available to use for trades. Your margin is very important as if you run out of margin the broker will close all your trades and you will be left with close to nothing. This is called a margin call. If you use the trading system and rules correctly, you will never have a margin call.

Leverage is the ratio of the amount capital used in a transaction to the required security deposit (margin). It is the ability to control large currency amounts of a security with a small amount of capital. Leveraging varies dramatically with different brokers, ranging from 2:1 to 500:1.

Forex Broker
A forex broker is a company that facilitates the buying and selling of currencies by means of an application called a trading platform. The forex broker is connected to the market and allows you as the trader to buy and sell different currencies. All transactions are done directly with the broker. Once you have opened an account you will deposit money into your trading account via the broker. You will open and close trades and withdraw money from the broker. The broker acts as a middleman between you and the market.

Trading Platform
A Trading Platform is an application which allows you to trade the market. In most cases, you can download and install a trading platform on various devices including smart phones, tablets, Laptops and PCs. You open and close trades using the trading platform. As mentioned in the previous section a forex broker oversees the platform and you must open an account with broker prior to getting access to the platform. It is important to note that the trading platform simply allows you to buy and sell, it will not assist you in deciding what to buy or when to sell, therefore the trading system software is important.

Demo Account
A demo account is a dummy or practice account which lets you practice trading without risking your money. A demo account is connected to live market data so that you can practice real live trading conditions, the money however is dummy money which is loaded onto your account for training purposes. Once you are comfortable with your trading you will move from a demo account to a live account.

Live Account
A live account is a real trading account. This account will use the money that you deposited to enter trades. The money in this account is real and all profit is yours and so are all losses. You will not see any money in your live account until you deposit funds.

An instrument is anything you can trade e.g. Gold, Oil, US Dollar etc. Any currency or commodity that you can trade on your platform is called an instrument.

Open a Trade
When we say open a trade we mean that you buy or sell an instrument. Spot forex is a CFD (Contracts for Difference) we can trade instruments in both directions. If we believe the value of an instrument will increase, we will buy the instrument. If we are correct we will make profit. Similarly, if we believe that the value of an instrument will decrease we will sell it. If it decreases, we will make a profit.

Close a Trade
When you close a trade, you are removing the trade from the market, and banking the trade, realizing the profit or loss. The amount of money that you have made or lost will be determined by the profit or loss that the trade was at the time of closing. If you were in $100 profit and you closed the trade $100 would have been added to your account. If your trade was at $100 loss, then $100 will be deducted from your account. You must close trades regularly to take profit, limit losses and allow for other trades.

Trading System
A trading system is a set of rules combined with software that assist you in making decisions on when to buy and when to sell. The trading system allows you trade in a systematic methodical way and assists you in making the correct decisions in a live trading environment which can be easy or complicated to use for a new trader.

An indicator is a visual representation of a mathematical formula that is displayed on a chart. This makes it easy as you do not have to sit with a calculator and work out complex equations. You can see them right on your chart, they are calculated in real time and move with the market. We make use of several as professional traders.

Types of Forex Orders

The term order refers to how you will enter or exit a trade. Here we explain the different types of forex orders that can be placed into the forex market. Be sure that you know which types of orders your broker accepts. Different brokers accept different types of forex orders. Basic order types are offered by all brokers.

Pending Order
A pending order is an order that you can setup to trigger when a certain price is reached. e.g. If you would like to buy US Dollars with Rands but you would only like to do so when the dollar goes back to R12 then, you can set a pending order to automatically buy dollars at this price. This is a great tool and saves you hours of time. Without pending orders, we would have to sit in front of our screens watching the market all day.

Stop Loss
A Stop Loss or SL is a tool which we use to protect our account. A stop loss acts as a safety net. We set a stop loss in the opposite direction of which we would like the market to go. If the market goes in the wrong direction and the trade is in a loss, the stop loss will close the trade in a loss at a certain level, limiting the loss to a certain amount per trade. The SL is set at the amount we are willing to risk for a trade.

Take Profit
A Take Profit of TP is your profit target. You set a certain price and at this price your profit will automatically be banked. So, it does the same as a stop loss but the net result is profit where with a stop loss the net result is a loss. It is extremely important to use both SL and TP levels for proper money management.

Market order (Market Execution)
A market order is an order to buy or sell at the best available price. For example, the bid price for GBP/USD is currently at 1.3240 and the ask price is at 1.3242. If you wanted to buy GBP/USD at market, then it would be sold to you at the ask price of 1.3242. Click buy and your trading platform would instantly execute a buy order at that exact price. Select the currency pair and click once to buy.

Limit Entry Order (Pending Order)
A limit entry is an order placed to either buy below the market or sell above the market at a certain price. For example, GBP/USD is currently trading at 1.3050. You want to go short if the price reaches 1.3070. You can either sit in front of your computer and wait for the price to reach 1.2070 (at which point you would click a sell market order), or you can set a sell limit order at 1.2070 (then you could walk away from your computer and do something else). If the price goes up to 1.2070, your trading platform will automatically execute a sell order at the best available price.

Stop-Entry Order (Pending Order)
A stop-entry order is an order placed to buy above the market or sell below the market at a certain price. For example, GBP/USD is currently trading at 1.3050 and is heading upward. You believe that price will continue in this direction if it hits 1.3060. You can do one of the following: sit in front of your computer and buy at market when it hits 1.3060, or set a stop-entry order at 1.3060. You use stop-entry orders when you feel that price will move in one direction

Stop-Loss Order
A stop-loss order is a type of order linked to a trade for preventing additional losses if price goes against you. A stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order. For example, if you buy (long) GBP/USD at 1.3230. To limit your maximum loss, you set a stop-loss order at 1.3200. If you were wrong and GBP/USD falls to 1.3200 instead of moving up, your trading platform would automatically execute a sell order at 1.3200 and close out your buy position for a 30-pip loss. Stop-losses are beneficial when you don’t want to sit in front of your computer all day. You can set a stop-loss order on any open positions to limit your loss on the trade and have the trade closed at a certain price.

Trailing Stop
A trailing stop is a type of stop-loss order attached to a trade that moves as price fluctuates. Let’s say that you’ve decided to sell (short) EUR/USD at 1.1130, with a trailing stop of 30 pips. This means that initially, your stop loss is at 1.1160. If the price goes down and hits 1.1100, your trailing stop would move down to 1.1130 (the breakeven point). The stop-loss will stay at this new price level of 1.1130. It will not change if market goes higher against you.

Going back to the example, with a trailing stop of 30 pips, if EUR/USD hits 1.1070 then your stop would move to 1.1100 (30 pips in profit). Your trade will remain open if price does not move against you by 30 pips. Once the market price hits your trailing stop price, your position will be closed automatically by a market order at the best available price.

Unusual Forex Orders

Good ‘Till Cancelled (GTC)
A GTC order remains active in the market until you decide to cancel it. Your broker will not cancel the order at any time. Therefore, it is your responsibility to remember that you have the order scheduled.

Good for the Day (GFD)
A GFD order remains active in the market until the end of the trading day. Because foreign exchange is a 24-hour market, this usually means 01:00 CAT since that’s the time rollover happens, but we’d recommend you double check with your broker.

One-Cancels-the-Other (OCO)
An OCO order is a mixture of two entry and/or stop-loss orders. Two orders with price and duration variables are placed above and below the current price. When one of the orders is executed the other order is canceled. Let’s say the price of GBP/USD is 1.3040. You want to either buy at 1.3095 over the resistance level in anticipation of a breakout or initiate a selling position if the price falls below 1.2985. The understanding is that if 1.3095 is reached, your buy order will be triggered and the 1.2985 sell order will be automatically canceled.

An OTO is the opposite of the OCO, as it only puts on orders when the main order is triggered. You set an OTO order when you want to set profit taking and stop loss levels ahead of time, even before you get in a trade. For example, AUD/USD is currently trading at 1.2000. You believe that once it hits 1.2100, it will reverse and head downwards but only up to 1.1900. The problem is that you will be gone for an entire week, to catch the move while you are away, you set a sell limit at 1.2000 and at the same time, place a related buy limit at 1.1900, and just in case, place a stop-loss at 1.2100. As an OTO, both the buy limit and the stop-loss orders will only be placed if your initial sell order at 1.2000 gets triggered

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