Explain currency trading terminology in detail
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currency term
Before learning any new skill, you need to learn the relevant terminology.
As a newbie to currency trading, you need to know currency-related terminology before making your first transaction.
Mainstream and non-mainstream currencies
All other currencies are called non-mainstream or minor currencies.
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base currency
The base currency is the first currency in any currency pair. Currency quotes show the value of the base currency relative to a second currency.
For example, if the USD/CHF exchange rate equals 0.9956, then one US dollar is worth 0.9956 Swiss francs.
The main exceptions to this rule are: GBP, EUR, AUD and NZD.
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denomination currency
The quote currency is the second currency in any currency pair, often referred to as the pip currency, in which any unrealized profit or loss is expressed.
Point (Pip)
The unit of measurement that represents the change in value between two currencies is called a "pip".
If EUR/USD moves from 1.1112 to 1.1113, this $0.0001 appreciation is 1 pip (ONE PIP). pip is usually the last decimal place in a currency pair quote.
Pipette
Most currency pairs are quoted to 4 decimal places, but there are some exceptions such as the Japanese Yen currency pairs (they are accurate to 2 decimal places).
Some currency brokers quote currency pairs to 5 and 3 decimal places instead of the standard 4 and 2 decimal places. These are called "fractional pips" or "pipettes". One "fractional pips" or "pipettes" equals one tenth of a "pip". For example, if GBP/USD moves from 1.28484 to 1.28485, that $0.00001 increase is a pipette.
This is what the pipette looks like in the trading software, the 6 in the upper right corner of 1.28506 in the picture below:
In trading software, the number representing a tenth of a pip usually appears in the upper right corner of two larger numbers.
Hand (Lot)
Previously, spot currencies were only traded in specific quantities, and the quantity standard for many products was 100,000 units of currency. Now, there are also mini, micro, and nano units of quantity, which are 10,000, 1,000, and 100 units, respectively.
Some brokers represent quantities in "lots", while others use actual currency units.
How to calculate the value of a pip?
Since each currency pair has its own relative value, it is necessary to calculate the pip value for a specific currency pair.
In the example below we will use quotes with 4 decimal places. To better explain calculations, exchange rates will be expressed as ratios (i.e. 1.2500 EUR/USD will be written as "1 EUR / 1.2500 USD")
Example: USD/CAD=1.0200
USD/CAD=1.0200 is interpreted as 1 US dollar to 1.0200 Canadian dollars (or 1 USD/1.0200 CAD)
[0.0001 CAD]×[1 USD/1.0200 CAD]
(The change in the value of the quote currency) multiplied by the exchange rate = pip value (in base currency)
or simplified as follows:
[(0.0001 CAD)/(1.0200 CAD)]×1 USD=0.00009804 USD/trading unit
In this example, if we were trading 10,000 USD/CAD, then for every 1 pip change in the exchange rate, the position would change by approximately $0.98 ($10,000 x 0.00009804 USD/CAD).
We use "approximately" because as the exchange rate changes, so does the value of each pip.
Calculate the pip value in your account
When you calculate the pip value of your position, how much account funds does one pip mean for your account equity?
The currency market is a global market, so not everyone's accounts are denominated in the same currency. This means that the pip value has to be converted to whatever currency our account may trade in.
This calculation method is the simplest, just multiply or divide the found pip value by the exchange rate between the account currency and the relevant currency.
Taking GBP/JPY = 123.00 as an example, the pip value of 0.813GBO is converted into the pip value of US dollars, and the GBP/USD exchange rate of 1.5590 is used as the ratio calculation. If the currency to be converted to is the denomination currency of the exchange rate quote, simply divide the found pip value by the corresponding exchange rate ratio:
0.813 GBP per pip / (1 GBP/1.5590 USD)
or:
[(0.813 GBP) / (1 GBP)] x (1.5590 USD) = 1.2674 USD per pip move
or:
So, in the case of GBP/JPY, for every 0.01 pip movement, the value of a 10,000 unit position changes by approximately $1.27.
If the currency to be converted to is the base currency in the exchange rate quote, simply multiply the PIP value found by the conversion rate ratio.
The above calculations will be automatically calculated by the trading software, but it is always good to know their internal logic.
As you probably already know, the change in value of one currency relative to another is measured in points (pips), which are very small percentages of a currency's unit of value.
In order to take advantage of this small change in value, you need to trade large amounts of a particular currency, magnifying your profits or losses.
Suppose we will trade 100,000 units, which is the standard LOT, now let's calculate how it affects the pip value:
USD/JPY, exchange rate 119.80: (0.01/119.80) x 100000=8.34 USD/point
USD/CHF, the exchange rate is 1.4555: (0.0001/1.4555) x 100000=6.87 USD/point
If USD is used as the quote currency instead of the base currency, the formula is slightly different:
EUR/USD at an exchange rate of 1.1930: (0.0001/1.1930) x 100000=8.38 x 1.1930=9.99734 USD/point
GBP/USD, the exchange rate is 1.8040: (0.0001/1.8040) x 100000=5.54 x 1.8040=9.99416 10 USD/point
Here are example pip values for EUR/USD and USD/JPY:
Your broker uses different ways to calculate the pip value in batches, but no matter how they do it, they can tell you what the pip value is for the currency you are trading at that particular time.
As the market changes, so will the pip value, depending on the currency you are currently trading.
Bid price
The bid price is the price at which a trader is prepared to buy a particular currency pair in the currency market. At this price, the trader can sell the base currency (it is displayed to the left of the quote sheet).
For example, in a quote of 1.2812/15 EUR/USD, the bid price is 1.8812, which means you need $1.8812 to sell one pound.
Ask/Offer Price
The ask price is the price at which a trader is prepared to sell a particular currency pair in the currency market. At this price, you can buy the base currency (it is displayed to the right of the quotation).
For example, in a quote of 1.2812/15 EUR/USD, the ask price is 1.2815, which means you can buy one euro for $1.2815.
Bid-Ask Spread
"Quoting in large figures" refers to the trader's expression using the first few digits of the exchange rate. These figures are often omitted in dealer quotes.
For example, the USD/JPY exchange rate may be 118.30/118.34, but when quoted verbally, it is reported as "30/34". In this example, the bid-ask spread for USD/JPY is 4 basis points.
Quote Conventions
Base Currency/Quotation Currency=Bid/Ask
transaction cost
transaction cost
The bid-ask spread is also the transaction cost of a transaction.
A transaction refers to a buy (or sell) transaction and a sell (or buy) transaction of the same size within the same currency pair.
For example, at a EUR/USD rate of 1.2812/15, the transaction cost is 3 basis points.
The formula for calculating the transaction cost is:
Transaction cost (spread) = selling price - buying price
cross currency pair
A cross currency pair is a currency pair in which neither currency is the U.S. dollar. The cross currency pair exhibited erratic price action as the trader effectively initiated two USD trades.
For example, initiating a buy EUR/GBP is equivalent to simultaneously buying EUR/USD and selling GBP/USD. Trading cross currency pairs usually requires higher transaction costs.
Margin
When you open a new margin account with a money broker, you must deposit a minimum amount with that broker.
Every time a new transaction is executed, a certain percentage of the account balance in the margin account will be used as the initial margin for the new transaction. The initial margin amount is determined by the base currency pair, the current price, and the volume of the trade.
lever
lever
Leverage refers to the ratio of the amount of capital used in a transaction to the required margin. It is a way to control large transactions with relatively little capital.
Leverage varies widely from broker to broker, ranging from 2:1 to 500:1.
You might wonder how much money a small investor like you can trade. Think of your broker as a bank that basically offers you $100,000 to buy currency and only asks you to give it $1,000 as margin. Sound unbelievable? This is the principle of currency trading with leverage.
The amount of leverage you use depends on your broker and your own affordability.
Typically, brokers require a deposit, also known as a "margin". Once you have deposited money with your broker, you can start trading. Brokers will specify how much margin is required for each trading position. For example, the leverage ratio is 100:1, and you want to trade a position worth $100,000, but you only have $5,000 in your account, you can still open a position at this time, and your broker will require $1,000 as a margin. Of course, any losses or gains will be deducted or added to the remaining funds in your account.
Minimum trade margins vary by broker. In the above example, a leverage of 100 times means that for every $100,000 traded, $1,000 is required as a margin. The $1,000 is not a fee, but a deposit that you get back when you close the deal.
Assuming the USD/JPY trade is currently the only open position in your account, you must maintain your account equity above $1,000 at all times in order for the trade to proceed. If USD/JPY plummets and your losses take your account equity below $1,000, the broker's risk control system kicks in and automatically closes your trade to prevent further losses. This is a safety mechanism to prevent the account balance from becoming negative.
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How do I calculate profit and loss?
Now that you know how to calculate pip and leverage, let's see how profit and loss are calculated. Suppose we buy USD and sell CHF.
The quotation is 1.4525/1.4530, because you are buying USD, so you need to calculate the asking price of 1.4530, which is the price at which the trader is ready to sell;
So you bought a standard lot at 1.4530;
A few hours later, the price rises to 1.4550 and you are ready to close your position for profit;
USD/CHF was last quoted at 1.4550/1.4555. Because you originally bought to open and to close the position, you must now sell, so you must be filled at the "buy price" of 1.4550, the price at which the trader is prepared to buy;
The difference between 1.4530 and 1.4550 is 0.0020 or 20 points;
Using our previous formula, we now get (0.0001/1.4550) x 10000 = $6.87/pip x 20 pips = $137.40
Bid-Ask Spread
Remember, when you open or close a position, you are affected by the spread in the bid and ask quotes. When you buy a currency, you use the ask price (Ask); when you sell, you use the bid price (Bid).
Currency Order Type
The word "order" refers to how you will enter or exit a trade.
Different brokers accept different types of currency orders. You need to make sure you know what types of orders your broker accepts.
market order
A market order is an order to buy or sell at the best price. For example, the ask price for EUR/USD is currently 1.2140, while the bid price is 1.2142. If you want to buy EUR/USD in the market, the market will sell you at 1.2142.
You can click "Buy" and your trading software will immediately execute the buy order at the market price.
If you've ever shopped online, it's a bit like the "one-click ordering" that some marketplaces use. You like the current price, just one click and it's yours! The only difference is that you are buying and selling currency pairs, not vinyl records or jeans.
Please note that depending on market conditions, there may be a discrepancy between the price you choose and the actual transaction price.
limit order
A limit order is an instruction to buy below the market price or sell above the market price at a certain price.
For example, if EUR/USD is currently at 1.2050 and you want to sell short at 1.2070, you can sit in front of the monitor and wait for it to reach 1.2070 (at which point you can click "Sell"). You can also set a limit order at 1.2070 (then you can leave the computer and go to the appointment). If the price rises to 1.2070, your trading software automatically executes a sell order.
Limit orders are used when you think the price will reverse when it reaches a price you specify.
Stop Entry Order
A stop loss order (Stop Entry Order) refers to an order to buy above the market price or sell below the market price at a certain price.
For example, let's say GBP/USD is currently trading at 1.5050 and is still on an uptrend. You think that if the price reaches 1.5060, it will continue in this direction. At this point you can do one of the following to validate your predictions:
Sit in front of the computer and wait for the price to reach 1.5060;
Set a Stop Limit order at 1.5060.
Stop Loss Order
A stop loss order is an order tied to an existing position to prevent additional losses should the price move against you.
If you are currently long, this is a sell stop order; if you are currently short, this is a buy stop order.
The stop loss order remains in effect until the position is liquidated or you manually cancel the stop loss order yourself.
For example, you are long (buying) EUR/USD at 1.2230. To limit your maximum loss, you place a stop loss order at 1.2200. This means that if your judgment is completely against the market and EUR/USD falls to 1.2200, your trading platform will automatically execute the sell order at 1.2200, closing the position with a loss of 30 pips.
Stop loss orders are great if you don't want to sit in front of your computer all day worrying about losing all your money.
trailing stop
A trailing stop order is a stop loss order attached to an open position that changes with price fluctuations.
Suppose you decide to short USD/JPY at the quote 90.80 and set a trailing stop loss of 20 pips. This means your stop loss is 91.00. If the price falls to 90.60, your stop loss position will move to 90.80.
However, remember that if the market moves against you, your stop loss position will not expand, it will remain at this new price level.
Going back to the example, if USD/JPY falls to 90.40, then your stop loss would move to 90.60.
As long as the price does not rise by more than 20 points, your position remains open.
Once the market price reaches your trailing stop price, you will be stopped out.
special currency order
Valid until canceled (Good'Till Cancelled, GTC)
Until you decide to cancel the GTC order, the GTC order remains valid in the market, and your broker will not cancel the order at any time. Therefore, you need to keep in mind the orders you have entrusted to your broker at all times.
Valid on the day (Good for the Day, GFD)
GFD orders are valid until the end of the current trading day.
OCO（One-Cancels-the-Other）
The currency market is a 24-hour market, and 5:00 pm ET is the time when the US market closes, but it is best to double check with your broker.
An OCO is an order pair where one order is executed and the other order is canceled.
Two orders with different prices and opening directions are placed above and below the current price. When one order is executed, the other order is canceled.
OTO（One-Triggers-the-Other）
Let's say the price of EUR/USD is 1.2040. You want to buy above resistance at 1.2095 in anticipation of a breakout, or start selling short if the price breaks below 1.1985. If the price reaches 1.2095, your long order will be triggered, and the short order at 1.1985 will be automatically canceled.
An OTO order is the opposite of an OCO order, it triggers one of the orders at the same time as the other.
When you want to set take profit and stop loss levels in advance, even before you place a trade, you set an OTO order.
As an OTO, buy limit orders and stop orders will only be placed if the initial sell order at 1.2000 is triggered.
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Summary about the order
The basic currency order types (market order, limit order, stop limit order, stop loss order) are usually all that most traders need.
The figure below is a summary of the four orders (the current price is the blue dot):
Unless you are an experienced trader (don't worry, you will become one over time as you learn more), don't fantasize and design a trading system that has a lot of orders all the time.
Before executing a trade, please ensure that you fully understand and are familiar with your broker's order system.
In addition, be sure to check with your broker for specific order information, such as overnight interest (inventory fees), etc.
