All currencies in forex trading are quoted in pairs, one against another. Their names are given as a three letter abbreviation known as ISO code, where the first two letters represent the country and the third one is the name of the currency.
Depending on how commonly they are traded, currencies can be divided into three categories:
Currency rate always represents the value of the base (first) currency expressed in the quote (second) currency. In Forex there are two prices given - Bid and Ask- the former shows how much of the quote currency is required to sell 1 unit of the base currency and the later represents how much will be required to buy it. Ask price is higher than bid. The difference between two prices is referred as to spread, which is usually measured in pips or points.
Previously, when only 4 digit precision was available, pip, or percentage in point, was the smallest unit to measure price fluctuations. With the introduction of more accurate 5 digit precision pricing the smallest unit of price change is called point, however 1 pip is still calculated by 4th digit.
For example, if Bid price is 1.11443 and Ask price equals 1.11449, spread is 0.6 pips or 6 points.
Direction wise, there are two types of trades:
Each of those can be opened either as a market or as a pending order:
Opened at current Ask price
Opened at a predefined Ask price, which is above the current one
Opened when the Ask price reaches the order level; the current ask is below this price
Closed at current bid price
Opened at a predefined bid price, which is higher than the current one.
Opened at a predefined Bid price, which is below the current one
Closing order is always opposite to the opening one, that is, by closing a long (buy) position you sell the amount back and vise versa - when you close a short (sell) position, you buy the amount you previously sold.
A position can either be closed manually at the current market rate or when a certain price level is reached, through Stop Loss and Take Profit orders.
In order to gain profit you need to close long positions when the price goes up and close short position when the price goes down.
To open a position you need to have a certain amount in your balance, which is commonly referred as to required margin or just margin. The amount depends on the trading tool, volume and leverage.
Note that if you have a USD account, the required margin will be calculated as follows:
(Current price × Volume in lots × 100 000 units) / leverage
For example, if your leverage is 1:200 and you open 0.5 lot EURUSD order at 1.12931, required margin is
(1.12931 × 0.5 lots × 100 000 units) / 200 = 282.33 USD
Required margin is always calculated automatically by the platform. To check how much approximately will be required to open a certain position, you can use our Forex Calculator.
When you open a position, note that your balance remains intact. In fact, it only includes deposits, withdrawals and closed trades.
The amount of required margin will be deducted from “Free margin” field, which also comprises of your floating profit or loss and deposit bonus if you claimed one. Free margin is the funds you can open positions with. Note that when you open a hedge order with the same volume, no margin will be required; however, if your free margin is negative, you will not be able to open an opposite position.
Free margin = balance - required margin + floating profit / loss (+bonus)
Another value affected by your profit or loss is equity, which is calculated is follows:
Equity = Balance + floating profit / loss (+bonus)
Equity is important because it, along with the required margin, determines your margin level:
Margin level = Equity / required margin × 100%
If you margin level falls under 15%, your open positions will be mandatory closed starting with the trade that has the highest floating loss.
Balance, equity, free margin and margin level are calculated automatically by the platform and available anytime in the “Trade tab”.
If you are not familiar with the trading platform, make sure to check our Manuals section for detailed instructions.
More information on how the forex market works, what tools and techniques you can employ to predict the direction of the prices or strategies you can apply is available in the Forex Basics section.
If you have any questions regarding the market, OctaFX website or trading conditions you can check our elaborate and comprehensive FAQ.
Whenever you encounter an unfamiliar term, word or market phenomena, you can check its definition and description in the Forex Glossary.
Our award winning Customer Service is always glad to answer any questions you have and is available 24/5.