Forex, or “FX”
Forex Pairs and Forex Quotes
Derivatives – a contract where the value of that contract is affected by an underlying condition or asset.
Contract For Difference (CFD) – a type of derivative where rather and agreeing to exchange anything there is an agreement to give or receive the difference in the value from the start to the end of the contract.
Opening and Closing a trade/contract – as you can start a derivative contract by selling or buying, initiating the contract is known as Opening. Closing the contract is essentially just talking the reserve position to the open. To close a buy you must sell and to close a sell you must buy.
Currency Pair – currency contracts (CFDS) are based on pairs. The contract is based on the change in value of ma fixed amount off one currency with respect to another currency.
Based and Quote currency – the base currency is the first currency in the pair and is the fixed amount. The Quote currency is the value that changes and is what determines profits and losses.
Leverage – this has different meanings in different areas of finance. In the context of FX trading, it essentially means the ration between position size and minimum required deposit.
Margin – margin in this context t is the equity/deposit required to secure the currency contract. It is essentially just an upfront amount we require for a given trade so a client does not run away when things go bad. The amount of margin required is determined by the leverage on the account.
Margin Level – this is the ration between a client’s equity and the total required margin for a trade. The reason margin level ism important is that our trading platforms have a system that closes trades when the level falls to a certain value (generally 20%).
Conterparty – it really just means the other side of the trade. In most cases the clients’ counterparts is us. We hedge our risk with another party and this goes up the chain to institutional banks such as JP Morgan, Citibank, BNP, Paribas and the like.
Hedging – offsetting exposure (risk) to one side with a matching position. So if I man long an asset I would ‘hedge’ my risk by shorting it and squaring my exposure. My doing so I would equally profit and lose regardless where the price moves and so my total equity would remain unchanged regardless what happens. Long an asset means I am in a position where my equity increases as the price increases (generally I own it). Short an asset is simply the reverse (generally, I have an obligation to sell it).