What is Forex?

It is the exchange of one currency for another or the conversion of one currency into another currency. Forex also refers to the global market where currencies are traded virtually around-the-clock. The term can also be abbreviated as “FX”.

The global FX market is by far the largest financial market with average daily volume in the trillions of US Dollars.

What Does “Currency Pair” Mean?

The pricing structure of the currencies traded in the Forex market involves the valuation of a currency in comparison to another currency. The first currency of the currency pair is referred to as the “base currency” while the second is called the “quote currency”. The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency.

What is a CFD (Contract for Difference)?

It is a contract between two parties speculating on the movement of an asset price. It consists of exchanging the difference in value of a particular currency, commodity or index between the time at which a contract is opened and the time at which it is closed. If the underlying asset rises in price, the buyer receives cash from seller, and vice versa.

When you enter a CFD contract, you are not buying the underlying asset, even though the movement of the CFD is directly linked to the asset price.

CFDs do not have an expiry date and you are able to trade on both the long and the short side of the market.

Since the client shall not own the underlying asset, he/she will be required to provide a deposit (margin) equal to a fraction of the total value of a position.

Transactions are conducted in lots. As an illustration,

* one lot is equal to 100,000 of the base currency of the transaction.

*0.1 lot is equal to 10,000 of the base currency of the transaction.

What Does “Bid” and “Ask” Mean?

Forex quotes consist of two prices. The offered price or “Ask” is the price which the client pays for a currency pair and conversely – the ”Bid” refers to the price at which he/she sells the currency pair. The difference between the Bid and Ask price of the CFD is called spread.

Falcon Brokers spreads and specifications of all tradable instruments can be found on our website.

What is Leverage?

Leverage is borrowing money to supplement existing funds with the aim to enhance or magnify the outcome of an investment. Leverage is virtually important to your trading activities /strategies but choosing an incorrect leverage could wipe out unrealized profit and/or result in losing your capital.

What is a Margin and Equity?

A margin refers to the amount of money required to open a leveraged position.

Equity refers to the account balance net of any loss or profit derived from an open position.

Free margin refers to the funds not used to guarantee an open position.

Free Margin = Equity – Margin.

As an illustration, please see the table below:

A client with $ 10,000 in a margin account that allows 100:1 leverage would be able to purchase a maximum of US$ 1,000,000 in currency contract (10 standard lots). The positions in a trading account could be partially or totally liquidated should the available (free) margin fall.

A Margin Call occurs when the client is called upon to add his/her margin to maintain an open position and short of that, the position(s) will be liquidated at market price.

What is PIP?

PIP or percentage in points refers to the smallest price incremental change an FX rate can make and it is the measure of a trade profit or loss.

Depending on the decimal place system and the quote, the PIP may be represented by the second, third or fourth decimal place.

Example 1: If EUR/USD is at 1.4123, the fourth decimal place is “3”. If the quote changes to 1.4124, then the increase is 1 PIP. If the quote changes to 1.4133, then the increase is 10 PIPs.

Example 2: If the USD/JPY is at 77.123, the PIP is the second decimal i.e. “2”. If the quote changes to 77.223, the increase is then 10 PIPs.