What is spread?
- The spread is the difference between the buy (ask) and the sell (bid) price of an instrument.
- The spread is one of the chief costs of a trade
- The tighter (smaller) the spread, the lower the cost of the trade
- We offer both ‘fixed’ spreads and ‘floating’ spreads, so you can decide which account best suits your trading style and strategy
The spread on financial markets is the difference between the buy (ask) price of an instrument and the sell (bid) price of an instrument. When placing a trade on the market, the spread is also the main cost of the position. The tighter the spread, the lower the cost of trading. The wider the spread, the higher it costs. You can also view the spread as the minimum distance the market has to move in your favour before you could start earning a profit.
For example, let’s say our EURUSD market is quoted with a buy price of 1.0984 and a sell price of 1.0983, so the spread is calculated by subtracting 1.0983 from 1.0984 – giving a total spread of 0.0001 or 1 pip. Once you’ve placed a trade on the EURUSD market and the market moves at least 1 pip in your favour, that’s when your position can begin generating profits. This is also the reason that when you first place the trade, you’ll start off making a small loss.
What is Currency Pair?
A currency pair is made of up two currencies traded in the forex market
All currency pairs are quoted in terms of one currency versus another
Each currency pair has a ‘base’, which is the first denoted currency, and a ‘counter’ which is the second denoted currency
Each currency could strengthen (appreciate) or weaken (depreciate). As there are two currencies in each pair, there are essentially four variables you are speculating on when it comes to currency pairs
There are major currency pairs and minor/exotic currency pairs
All forex pairs are quoted in terms of one currency versus another. Each currency pair has a base which is the first denoted currency, and a counter which is the second.
When you place a trade on a currency pair, you’re essentially buying one currency and selling another – but in a single transaction. So for example, going long or ‘buying’ EUR/USD means you’re buying the Euro and selling the US dollar. Going short means that you’re ‘selling’ the Euro and buying the US dollar.
Currency values rise (appreciate) and fall (depreciate) against each other due to a number of economic, geopolitical and technical factors and the forex market is the most traded in the world, with an average turnover in excess of $5 trillion a day. This makes it a highly volatile market and it’s available to trade on 24 hours a day, five days a week (Monday to Friday).
What are the major currency pairs?
Major currency pairs are the most traded currency pairs in the world and it is estimated that trading on those currencies represents over 80% of the whole foreign exchange market. Those currency pairs are: EURUSD, GBPUSD, USDCHF, AUDUSD, NZDUSD and USDCAD.
Out of all the majors, the EURUSD is the most liquid currency pair; meaning that it is the most traded currency pair in the world.
What is Contract for Difference?
Contracts For Difference (CFDs) are specialized and popular Over The Counter (OTC) financial derivative products which enable you to trade on the price movement of financial assets, including Indices Futures, Commodity Futures, Shares, and Exchange Traded Funds, without actually owning the underlying Asset.The main benefit of trading CFDs is the flexibility to trade against price movements without actually buying or selling the physical financial assets. Profitto’s CFDs derive their price from the underlying asset. You can trade CFDs if you believe the price of a financial instrument is likely to go up in value (strengthen), and also if you think it is likely to go down (weaken). Your profit or loss in online CFD trading is determined by the difference between the price you buy at and the price at which you sell.
What is leverage?
Leverage allows a client to trade without putting up the full amount. Instead a margin amount is required. For example, 50:1 leverage, also known as 2% margin requirement, means $2,000 of equity is required to purchase an order worth $100,000. 400:1 leverage means $250 is required to purchase an order worth $100,000. Leverage increases both upside and downside to risk as the account is now that much more sensitive to price movements.
A margin call is a protective measure that helps traders to manage their risk and prevent additional losses.
A margin call, also known as a margin stop, is a protective measure that helps traders to manage their risk and prevent additional losses
The limit level is calculated by dividing your equity by the required margin and multiplying by 100%
Margin calls happen when there aren’t sufficient funds to cover the margin requirement
At Profitto, a margin call occurs when your margin level falls below 30%
Once a margin call occurs, your open position with the biggest loss will be automatically closed until your margin level returns back above 30% to protect your account from suffering further losses. This is how Profitto helps you to manage your risk.
To avoid being closed out of your position by a margin call, you’ll need to ensure your margin level remains above 30% by depositing more funds
Limiting losses is one of the most important aspects of trading and many traders choose to use stop loss orders (hyperlink to stop loss) as a protective measure. On the other hand, some traders decide to manage their risk manually by monitoring their open transactions.
Your margin level is the deposit required to maintain each open trade on your account. To open and maintain your trade, you must have sufficient trading resource to cover the margin requirement at all time.
Free margin represents the amount of capital you have remaining to place new trades or cover any negative price moves in your open trades.
The margin stop is a protective measure, particularly for traders who do not use stop loss orders. When the margin level falls below 30%, your open position with the biggest loss will be automatically closed as an in-built safety mechanism.
What is the margin level and how does it affect your trading?
The margin level is a risk management indicator that helps you understand the influence of the currently opened positions on your account.
Margin level is a mathematical equation that effectively tells the trader how much of their funds are available for new trades
The higher the margin level, the higher the amount of cash available to trade
The lower the margin level, the lower the amount of cash available to trade and this is where an account could be subject to a margin call
How is margin level calculated?
It is calculated by the following formula:
Margin level = equity/margin x 100%
If you don’t have any trades open, your margin level will be zero. Once a position is opened, the margin level will depend on several factors such as:
- Type of market
What are swap points?
Rollovers on financial instruments occur overnight on the underlying instrument.
They affect traders by accruing or charging open positions with either positive or negative swap points, depending on the instrument.
To maintain a trade or rollover the trade from one day to the next, the trade is subject to a swap. This is otherwise known as the amount of interest charged or credited to your account to maintain the trade and differs across instruments.
In order to have a clear picture about how a trader’s position may be affected by holding the position overnight, it is important to understand how many pips will be accrued or charged on the trader’s position.
Swap points may be calculated manually after calculating the value of a pip.
If a trader opens a 1 lot transaction on the EURUSD, then if the trader holds a buy transaction overnight his account would be accrued with the value of 0.05 GBP. On the other hand if the trader holds a sell transaction overnight his account would be charged with the value of 3.79 GBP.
The accruals and the charges are dependant on the financial instrument the trader is interested in and many traders have strategies based on holding positions overnight in order to receive the highest possible accruals. Popular markets used for such strategies include USDTRY, USDMXN and EURAUD.
Additionally most indices do not cause any accruals or charges to the trader’s open positions and you can find the complete swap point rates here.
The swap point rates may help traders to manually calculate the swap points that may affect open positions and this can be done by the following calculation: Swap point rate x Pip value.
What are pending orders?
There are two transactions types; instant execution and pending orders.
Whereas instant execution opens a transaction at the price currently quoted on the market, pending orders allow you to set orders that will be activated once the price reaches a level chosen by you.
There are four types of pending orders that you can utilize at Profitto and they include:
1. Buy Stop
The Buy Stop order allows you to set a buy order above the current market price. What this means is that if the current market price is $20 and the set Buy Stop price is $22, then once the market reaches the price level of $22, a buy transaction will be executed on this market.
2. Sell Stop
The Sell Stop order allows you to set a sell order below the current market price. What this means is that if the current market price is $20 and the set Sell Stop price is $18, then once the market reaches the price level of $18, a sell transaction will be executed on this market.
3. Buy Limit
The Buy Limit order allows you to set a buy order below the current market price. What this means is that if the current market price is $20 and the set Buy Limit price is $18, then once the market reaches the price level of $18, a buy transaction will be executed on this market.
4. Sell Limit
The Sell Limit order allows you to set a sell order above the current market price. What this means is that if the current market price is $20 and the set Sell Limit price is $22, then once the market reaches the price level of $22, a sell transaction will be executed on this market.
What is stop loss?
- A Stop Loss is a type of closing order to automatically close a trade once prices hit a specific level in the market, normally for a loss
- A Stop Loss is one of the most popular tools for traders to minimise their risk
- If you are only willing to accept a certain level of loss, a Stop Loss will close the trade once prices hit the the price level you’ve defined.
- A Stop Loss is automatic – so you don’t have to manually monitor your positions. This provides a certain level of control and comfort
Experienced traders will testify that one of the keys to achieving success on financial markets over the long term is prudent risk management. Utilising a stop loss is one of the most popular ways for a trader to manage their risk, around the clock.
What is a Stop Loss order?
A stop loss is a type of closing order, allowing the trader to specify a specific level in the market where if prices were to hit, the trade would be closed out by our systems automatically, typically for a loss. This is where the name Stop Loss originates from, because the order effectively stops your losses.
How does a Stop Loss order work in practice?
Let’s analyse the below example. The trader has opened a long position on EURUSD in expectation that it will increase in value above 1.09935, which is shown by the first line. You’ll notice a second line below that, which is a Stop Loss set at 1.09842. This means that if the market falls beneath this level, the trader’s position will be automatically closed at a loss – and therefore the trader is protected from any additional price moves lower.
A Stop Loss helps to manage your risk and keep your losses to an acceptable and controlled minimum amount.
Do stop losses provide complete protection?
Whilst stop loss orders are one of the best ways to ensure your risk is managed and potential losses are kept to acceptable levels, they don’t provide 100% security.
Stop losses are free to use and they protect your account against adverse market moves, but please be aware that they cannot guarantee your position every time. If the market becomes suddenly volatile and gaps beyond your stop level (jumps from one price to the next without trading at the levels in between), it’s possible your position could be closed at a worse level than requested. This is known as price slippage.
What is slippage?
It’s the experience of not getting filled at (or even very close to…) your expected price when you place a market order or stop loss. This can happen because either: market price is simply moving too fast, the market is not liquid or you’re talking to an unmotivated broker. Slippage typically occurs in a very volatile market (such as when there is a systemic effect that causes the entire market, asset or currency to fall, creating a situation where there are no traders to purchase the position at a stop loss. Sometimes, it occurs because brokers fill the large trade orders of institutional traders first, and by the time they move to the smaller retail orders, the large demand on the asset created by the institutional orders has driven prices too far.
What is point?
The word ‘point’ can be used in different ways in the financial markets. It could be used to mean the minimal price change in an asset or currency pair. E.g. initial price of the security was 1.3550 and it has dropped to 1.3545. It means that there was a 5-point rate change. A point can also be used to refer to ‘basis point’, which is one-hundredth of a percentage point or 1/10000. It is a term popularly used to describe the changes in the interest rate in one year for a currency. Point can also be used to refer to percentage point, which is the arithmetical difference between two percentages.
What is pips?
The smallest increment of change in a foreign currency price, either up or down. A pip is known as percentage interest point, and is equivalent to 0.0001 or ten-thousandths of a unit number of 1. For the Yen crosses, a pip is equivalent to 0.01
What is BID?
The price at which the market is prepared to buy a product. Prices are quoted two-way as Bid/Ask. In FX trading, the Bid represents the price at which a trader can sell the base currency, shown to the left in a currency pair. For example, in the quote USD/CHF 1.4527/32, the base currency is USD, and the Bid price is 1.4527, meaning you can sell one US Dollar for 1.4527 Swiss francs. In CFD trading, the Bid also represents the price at which a trader can sell the product. For example, in the quote for UK OIL 111.13/111.16, the Bid price is £111.13 for one unit of the underlying market
What is ASK?
The price at which the market is prepared to sell a product. Prices are quoted two-way as Bid/Ask. The Ask price is also known as the Offer.
In FX trading, the Ask represents the price at which a trader can buy the base currency, shown to the left in a currency pair. For example, in the quote USD/CHF 1.4527/32, the base currency is USD, and the Ask price is 1.4532, meaning you can buy one US dollar for 1.4532 Swiss francs.
In CFD trading, the Ask also represents the price at which a trader can buy the product. For example, in the quote for UK OIL 111.13/111.16, the product quoted is UK OIL and the Ask price is £111.16 for one unit of the underlying market.
What is Equity?
the secured part of the client account, including open positions, that is bound to the Balance and the Floating rate (profit/loss) by the following formula: Balance + Floating + Swap, i.e. the funds on the client account minus the current loss of the open positions, plus the current profit of the open positions.