Forex FAQ | MulderFX.com

What are currency pairs?
Currency is always presented in pairs. For instance, when you are trading in EURUSD, the exchange rate is against American dollars. Currency is purchased (long position) whereas the other is sold (short position).

What is bid-ask spread?
The bid-ask spread is the spread between buying and selling two pairs. The bid rate is the “best” for selling. The difference between the bid rate and the ask rate is known as the bi-ask spread. The bid-ask spread varies for each exchange rate, in which the common (most important) exchange rates have more narrow spreads.

The definition of a Pip?
Currency is expressed with a number of digit after the comma. The last digit, called a “pip” represents the smallest possible movement of a currency rate and looks a lot like ticks or points of other financial instruments. An example: if the EUR/USD would rise 10 pips, the currency pair goes from 1.2920 to 12930. Half pips are a more recent development and provide traders with even more narrow spreads, as well as sharper and more transparent rate information.

The definition of margin
Investing with a margin means that an investor can buy and sell values that are worth more than the capital on the account. Usually, Forex is traded with a margin and in this sector it is customary to trade with a relatively small margin, since the daily rate fluctuations of currency is usually less than one or 2 percent.

Margin, or leverage, implies that the investor is “steering” his or her funds. Margin percentages of 1% on the first USD 25.000 on your account and 2% on values above that are normal in online trading. This means that, with a margin of 1.0%, you can trade up to an amount of USD 1.000.000 even if you just have USD 10.000 on your account. Expressed in leverage terms, this corresponds with 1:100, since 100 times USD 10.000 equals USD 1.000.000 or in other words, 10.000 is 1.0% of USD 1.000,000.

Leverage is a powerful accelerator
The use of leverage allows for fast generation of profit, but the risk of fast loss is also present. It is important to evaluate the margin thresholds and restrictions in your trade agreement to be able to determine the range of trade activities you’ll be able to conduct.

Trading volume
The trading volume is restricted by the margin position. A trader that has USD 10.000 in assets for instance and 1% margin, can trade with a maximum of USD 1.000.000, but it would be very unwise to take just one position with this amount, as it would lead to a margin call if the position were to fluctuate somewhat.

Margin order types
The Forex trade includes a number of order types that facilitate transactions and make them more efficient. We will define some of the most common terms below.

Limit
A limit order is usually used to enter or exit a market at a certain price, better than the market rate. In addition, the investor can use a limit order to manage the period during which an order remains open, before it is cancelled.

Stop if Bid
A Stop if Bid order is used to buy or sell currency if the bid rate breaks through a certain rate level in the market. Stop if Bid orders are usually used to buy a Forex position as soon as a certain level is passed.

Stop if Offer
A Stop if Offer order is used to buy or sell currency if the ask rate breaks through the level indicated in the price field. Stop if Offers orders are usually used to sell a Forex position, to ensure that a certain level is passed. Relating orders provides the investor with a logical link of order types, allowing him to control the market fluctuations which makes it easier to traded in moving markets.

One Cancels Other (OCO)
The most common linked order, OCO, determines that, if a part of the order is executed, the other part is automatically cancelled. In the Forex trade, OCO usually refers to a purchase- and sell order linked together, so that when one of the orders is executed, the other is cancelled. You can see the OCO as follows: the trader protects a current position against loss (stoporder) while ensuring profit-taking (limit order).

If Done (ID)
This conditional order, also known as secondary order, only becomes active if the primary order is performed first. An example of this is an existing order to traded EURUSD at 1.2500 and a secondary order to sell at 1.2400 Stop if Bid – if the first order has been executed.

Trailing Stop
A trailing stop order is a stop order with a variable price that changes as the spot price changes If the market is ascending (for ascending/long positions) the stop price increases in line with the pace determined by the user, however, if the market price drops the stop price remains unchanged. This type of stop order helps an investor establish a limit for the maximum loss, without restricting the possible profit regarding a position. It also reduces the necessity to keep track of the market prices of open positions.