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A layman's understanding of basic Forex terms - please let me know if I got it wrong!
I'm a total newbie - please go easy on me! Here are some of the things I'm attempting to articulate; if I got it wrong, hope you could correct me. Okay, here we go:
Lot and Volume
Lot is a collection of units. This actually depends on the Trading Platform. 1 lot can be 100K whilst on a different Platform, it can be 10K. A lot and a volume is identical, but differs only on formatting e.g. 1K lot or 10K lot can be 0.1 or 1 volume respectively.
10K Units = 1 Lot = 1 Volume
I may get this wrong but does that mean if I buy or sell 1 volume (i.e. 1.00 or 10K units), it would equate to 10K * quoted currency?
1 unit is basically a dollar for USD. It's the base currency of the trader's account and not necessarily the traded pairs per se; but it can be used interchangeably.
EUD:USD. Though the base for this pair is EUD, the base unit itself is USD if the trader's account is USD.
But to be honest, sometimes I do get confused when people say 'based currency'; if there's a different explanation, please let me know!
A pip is basically the smallest difference in a pair currency ('difference' here means Buy - Sell). A pip can be either on the 4th position or the 2nd position.
1.0601 - 1.0600 = 0.0010. So we say the trader has gained 1 pips.
I understand there's "Pippetes" - I don't think this is critical (yet) for a beginner?. As I understand it's the 5th or 3rd decimal?
Lot Size and Pip Value
Your chosen lot size can determine the value per Pip. The formula is: Lot size \ Pip*
10K * 0.0001 pip = 1$ So if there's a positive difference, you'd get 1$ gain.
Your profit can be determined by the following: (Pip / Quote rate) * Lot Size
Say, EUD:USD is 1.0000:1.0001, so a difference of 1 pip. Thus, (0.0001/1.0001) * 10K = $0.9. You'd gain $0.9 per trade.
(not too sure about this one actually)
Leverage and Margin
Personally, I see leverage as % of how much you must have in your account against the "capital" the broker would give. Formula is (1/X)*100. The minimum amount you must have to trade by the given leverage is known as 'Margin'
Say the broker will give you 1 lot of 10K Units. But you must have 1% of that amount deposited. So that's 1:100 or (1/100) *100 = 1%. So 1% of 10K is $100. You need to deposit $100 to trade and the broker will give you a $10,000 capital. Your margin is basically $100.
The higher the % of the Margin Level, the better; this basically means you have money to trade as your Used Margin is low! Equations is: (Equity/ Used Margin)/100
As I understand, levels lower than 100% is not good as your Used Margin is getting larger. A 5% will force your broker to close your trades automatically. When your broker closes your trades like this, a Margin Call Level is used.
For "Used Margin" I understand this only for all "Opened" trades, and not "Closed" trade?
Balance is balance :p (hehe). It's basically what's left from whatever you've deposited.
It's basically your real-time balance. It includes current profit and losses that are not closed yet.
I want to compare Free Margin here but not too sure how to word it. I understand the formula for Free Margin is Equity - Margin.
Okay, that's about it for today! If I got any inaccuracy, or if I got things TOTALLY wrong and I'd fall flat on my face, please feel free to let me know!!
What are your thoughts as using forex swap as long term investment?
Looking at GBP/CHF specifically with its high swap rate and current low. Just buy at a low point and let it sit for a year and just collect the swap. Obviously have enough capital to withstand the market fluctuations over the year. With my broker, the yearly swap will roughly return 75%. Has anyone done this as long term investment? What are some pros and cons?
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