What does margin mean?
The leverage depends on the margin. The lower the margin, the higher the leverage. And the higher the leverage, the higher the profits can be, but also the higher the losses. To calculate the direct leverage use the following formula Leverage = 100 / (Margin in percent). So, if the margin is 5%, the leverage is 20. If the investor now invests 1 000 Euro, he can work with a capital of 20 000 Euro thanks to the leverage. The remaining 19 000 euros are leveraged and are taken over by the broker. Leverage is one of the great advantages of currency trading and enchants investors with high return opportunities with little equity. However, beginners should choose the leverage as small as possible, because unfortunately the leverage does not only affect profits.
What is meant by pip, tick and lot?
Once you have looked at a broker’s trading software, the terms “pip” and “lot” quickly catch your eye. A pip, an abbreviation for “percentage in point” or “price interest point” indicates the price change of a currency pair. The unit is thus used to indicate profits or losses. As a rule, the pip is given to the fourth decimal place, with the exception of the Japanese yen, where it is given to the second decimal place.
The pip is given depending on the digits before the decimal point, the majority of foreign currencies have one digit before the decimal point, in the case of the Japanese yen it is three, which is the reason for the change in the pip indication. The pip the measure of the profit or loss, and therefore the basis for calculating the spread. For example, if the USD/GBP rate increases from 1.5555 to 1.5558, then the pip has increased by 3. Some brokers display more than four decimal places. This extension offers the possibility of even better calculation, the pip is then also called micro-pip or mini-pip.
A tick refers to the smallest price change of a price, it is also called a quote jump. In stock trading, exchanges set their own tick size, in foreign exchange transactions with major currencies, 10 ticks make a pip. Here is an example: If the USD/EUR rate rises from 1.5555 to 1.5557 the pip has increased by 2, the tick has increased by 20.
The size of a position in foreign exchange trading is given in lots. In normal contracts and as long as nothing else is specified, a lot stands for 100,000 units of the base currency, so a lot of EUR/USD stands for 100,000 euros. Other lot sizes are mini lots with 10,000 units or micro lots with 1,000 units of currency.
What are the different order types?
Anyone who enters the foreign exchange market quickly realizes that there can be quite different designations for one and the same thing, such as selling or buying. With different order types, investors can better plan their strategies and trigger complex transactions without always having to keep an eye on the market. Not every trading platform offers every order supplement, so before you start trading, you should find out about available order supplements. There are three different types of orders.
- Market orders are orders that are immediately routed to the market and executed. In the case of a market order, no price is specified or fixed, the price that prevails at the moment is taken. Buy orders are executed at the ask price, sell orders are executed immediately at the current bid price. Market orders are the means of choice when you want to react quickly, open or close a position.
- Limit orders can be of different sizes. Generally, with a limit order, the transaction is not executed until certain conditions are met. Limit buy orders are set when you want to buy at a certain price, usually below the current market price. If the market price falls, the limit buy order is executed immediately. Limit sell orders work in the same way: you hold the order until the price would reach a certain price, then you sell. Limit orders allow you to quickly take advantage of advantageous price changes, but orders may not be executed at all if the price does not move as specified in the limit order.
- Stop orders, like limit orders, are also usually executed with a delay. A stop buy order is executed when the price is above a certain price. Similarly, a sell order with a stop sell order is executed only when the price falls below a certain mark. Stop orders are often called stop-loss orders because they are good for limiting losses. Many trading novices are advised to familiarize themselves with the principle of the stop-loss order, as many beginner’s mistakes can be cushioned with this type of order.