Forex Terminology

Forex markets, just like most of their other counterparts, have a number of terms considered "Forex lingo". If you've been reading something about Forex and have absolutely no idea what something meant, take a look at this guide to see if we can possibly explain that term in a better and more understandable way.

Spread

The spread on a particular currency pair is the difference between the "bid" and "ask" prices. This represents the cost of trading. If for example the spread on the EUR/USD was 3.0 - it might mean that the quote would read: 1.3020 / 1.3023.

Essentially, you could buy the pair at 1.3020 and simultaneously sell it for 1.3023 - representing a 3 pips loss. This loss is the broker's profit - which is how they are able to avoid charging you a commission.

Pip

A pip is a single price unit in Forex. For example - if a currency pair was quoted at 1.2050 and then moved up to 1.2075 - it is said to have increased by 25 pips. Additionally, say the quote was 85.50 which went to 85.20 - the currency pair has decreased (depreciated, fallen, etc) by 30 pips.

Rollover (Financing Cost)

Because Forex trading involves leverage (which is essentially borrowed money) there is a financing cost for holding positions (charged once per day). This financing cost is usually charged on positions which are open at a particular time (i.e. 5pm GMT).

Make sure you check with your broker to see what the rollover fee (or premium payable to you) is on any particular currency pair.

Margin

Margin is the amount of money required in your trading account to place a single trade. This is dependent on the amount of leverage you are able to trade with. Let's assume your broker offers you 100:1 leverage.

If you want to open a trade for $10,000 - you'll be required to have margin (that is, capital in your trading account) of $100 available. Whilst the trade is open, the margin will be frozen so you can't use it for another trade.

Margin Call

Because margin is the brokers way of "securing" your open trade - you need to maintain a certain level of margin for any open trades that you have. Whilst a small level of loss is usually permitted on an open trade, you'll soon find that your broker will require excess money to be in your trading account for any open trades.

A margin call occurs when the available cash in your trading account falls below a certain level which is predetermined by your broker. In this situation, your open positions are often automatically closed by the broker for a loss (which is not what you want to have happen!).