Trading terms and definitions
We believe that education is the foundation of financial success. Our mission is to equip you with the information and fundamental knowledge about trading that you need to navigate the financial world with confidence.
1. Main trading platform parameters
Balance represents the total financial sum of all funds deposited into, and withdrawn from, the client's account, as well as the cumulative result of all closed positions in the account. The account balance fluctuates with the closing of trades.
Leverage enables traders to operate a trading volume greater than the capital available in their trading account. For example, with 1:500 leverage, each $1 of your own capital allows you to control a position worth up to $500.
In some cases, leverage is expressed as a %, depending on the contract specifications of each broker. For instance, a leverage of 1:500 equates to 0.2%, while a leverage of 1:20 equates to 5%.
It is a net worth of funds in the client’s account.
Equity = balance + floating profit - floating loss +(-) swap - commission
Equity fluctuates with your open trades. If a trader has profits, the equity will exceed the balance. Conversely, when experiencing losses, the equity can be lower than the balance.
Margin represents the portion of the client's account balance reserved to maintain open positions, in accordance with margin requirements. It is essential for traders to understand how much capital is necessary to open their desired positions. The margin is always calculated in the currency of the trading account.
Margin = Lot size * Market Price ÷ Leverage
Where:
* Lot Size = Volume * Contract Size (the number of units being traded).
* Market Price: The current price at which the instrument is being traded.
* Leverage: The leverage ratio offered (e.g., 1:100, 1:500, 1:1000).
Free margin is the equity in a trader's account that is not reserved for margin or open positions, and is available to be used for opening new trades.
Free margin is the money in a trading account available for placing additional orders.
The formula is:
Free margin = equity - margin
The margin level is used to determine if a trader can open more positions. This value is specified as a percentage (%).
The formula is:
Margin level = (equity / margin) * 100
When a trader opens a Buy position, profits are realized if the market moves in their favor, meaning the price rises. If a trader closes their trades at a higher price than the opening price, they will make a profit. Conversely, if trades are closed at a lower price than the opening price, the trader incurs losses.
Profit or Loss can be calculated using the following formulas:
Pnl (Buy) = volume * contract size * (close Price - open Price)
Pnl (Sell) = volume * contract size * (open Price - close Price)
2. Additional trading parameters
The swap represents the overnight adjustment amount that is either credited or debited from a client's account between 23:59:30 and 23:59:59 in the trading platform's time zone. It can be either positive or negative. The swap can be measured in pips or as an interest rate.
1. If the swap is measured in pips:
Swap = 1 pip value × swap value
2. If the swap is measured at interest rate (%):
Swap = swap value × volume × contract size × price at the moment of charging swap
/ 100
The commission is the fee charged by any broker for executing trades in the market. Commission levels vary between brokers depending on the asset being traded and the type of service offered.
Commissions can be a fixed fee per lot traded or a percentage of the trade's nominal volume. For example, a broker might charge $5 per standard lot traded or 0.1% of the trade's volume.
The formula to calculate the commission is:
Commission = volume (lots) * trade commission (based on contract specifications)
The spread is the difference between the ask price and the bid price of a financial instrument. It represents the cost of executing an order and is included as a floating loss when the order is opened. This means that when an order is opened, the client always faces a negative profit due to the spread.
How do liquidity and volatility influence the spread?
The higher the liquidity, the lower the spread, meanwhile, the higher the volatility, the higher the spread.
The spread is a main source of profit for many brokers and can be either floating or fixed, depending on the type of broker, such as STP, ECN, or Market Maker. When the spread is floating, it increases or decreases in accordance with market conditions.
Note: By default, the chart on the trading platform is formed by the Bid price. When you open an order, the price depends on the direction: a Buy order opens at the Ask price, and a Sell order opens at the Bid price. However, when the order is closed, it will be executed at the opposite price: a Buy order closes at the Bid price, and a Sell order closes at the Ask price.
A pip, an acronym for "percentage in point" or "price interest point," is a measurement tool related to the smallest price movement of an instrument in the market.
Currency pairs are usually quoted to four decimal places (the most pairs) and to second decimal, but some forex brokers quote currency pairs to five and three decimal places instead of the standard "4 and 2".
Generally:
* Currency pairs - 1 pip is equal to a price increment of 0.00010 or 0.010
* Indices - 1 pip or index point is equal to a price increment of 1.0
* Metals - 1 pip is equal to a price increment of 0.01
* Other instruments - 1 pip is equal to the tick size.
The formula to calculate 1 pip value is
1 pip value = volume * contract size * tick size
The pip value is always calculated in the quoted currency of the instrument. It is important to convert the pip value to the trading account currency to get the correct result. Example:
AUDCAD 1 lot
account currency USD
volume 100 000
pip value 10 CAD
10 CAD to USD: 10 / 1.44577 = 6.92 USD
Where 1.44577 is the USDCAD price taken from the trading platform.
There are two trading modes: netting and hedging.
* Netting is a trading order management system in which only one position can be opened for a particular instrument in any direction within a trading account at a given time.
* Hedging is a trading order accounting system that allows multiple positions to be opened for the same instrument in the same direction.
Reinvestment involves reinvesting the current floating profit, with the expectation that the trend will continue favorably for the client. Reinvestment of profit is only possible with a trading account in netting mode.
December 15, 2024
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Email: info@financebridgepartners.com
Requirements for clients:
By using our services, you confirm that you are at least 18 years old.
Clients should possess a comprehensive understanding of margin trading and the risks associated with trading financial instruments. This includes familiarity with leverage, market volatility, and potential financial loss.
Clients are responsible for ensuring that their trading activities comply with the laws and regulations of their home country. This includes understanding any legal restrictions or requirements related to trading foreign exchange, commodities, or other financial instruments.
Clients must confirm that they are not politically exposed persons (PEPs). A PEP is an individual who holds a prominent public position or has been entrusted with a high-profile role by a government or international organization, including close associates and immediate family members.
Risk Warning:
Trading financial instruments carries a high level of risk and may not be suitable for all investors. The potential exists to lose more than the initial investment. The past performance is not indicative of future results. Trading requires a sound understanding of financial markets, and you should be aware of the potential for significant losses. Only trade with funds you can afford to lose, and consider setting stop-loss and take-profit levels to manage your risk exposure effectively.
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