on the Forex market
Novotrend is designed for those just starting out.
acquaintance with the foreign exchange market
"Basic terms and concepts"
If you are a beginner trader, then Forex trading may seem difficult for you, but it is not. This lesson is devoted to the basic terms and concepts of exchange trading
What is leverage / leverage;
What is a lot;
What is spread;
What do the terms stop loss and take profit mean?
Leverage or leverage
Thanks to leverage, you can make transactions in an amount exceeding your deposit. For example, if your deposit is $ 1000, you can open a trade for $ 2000, then your leverage will be 1: 2.
What is leverage for? How does it work?
Leverage is appropriate to use when trading instruments with low volatility, for example:
- EUR / USD (euro to US dollar);
- USD / CHF (US dollar to Swiss franc).
Such assets have extremely low activity. The price change for them can be a maximum of 3 - 5% per day, but at the same time they are easily predictable, well suited for beginners.
So what happens when you trade with leverage? Let's assume that you have chosen 1:10 leverage when opening an account. This means that the maximum volume of your transactions can exceed your deposit by no more than 10 times. Thus, if your deposit is $ 1000, then you can open a deal up to $ 10,000 or less.
Accordingly, if you have chosen a leverage of 1:20, then the maximum volume of your transactions can exceed your deposit by no more than 20 times. If your deposit is $ 1000, then you can open a deal up to $ 20,000 or less.
Leverage: Main Pros and Cons
When you use leverage, you increase not only your potential profit, but also your potential loss. For example, you bought Gazprom shares with $ 1000 on your deposit and did not use leverage. The shares fell 5%. In this case, your loss will be 5% or $ 50.
However, if you bought shares with a leverage of 1: 2, then you open a deal with a volume exceeding your deposit twice. If your deposit has $ 1,000, and you open a deal for $ 2,000, accordingly, all changes are multiplied by 2.
Suppose that Gazprom shares fell by 5%, but from $ 2,000 it is already $ 100, not $ 50. And your loss in this case will no longer be 5%, but 10% of the deposit.
Your profit increases in the same way. If you, having $ 1,000 on your deposit, open a deal for $ 4,000, then your leverage is 1: 4. This is because the volume of your trade is 4 times your deposit, and all changes are multiplied by 4.
For example, you bought shares of Sberbank, and they went up by 5%. In this case, you will receive not 5% profit, but 20% or $ 200.
Drawing a conclusion from the above, we can say that the larger the leverage, the greater the size of the potential profit or loss.
What is a lot?
So, we figured out what leverage is. In fact, this is a limitation of the maximum trading volume.
Lot is a trading volume, that is, the volume of your transaction in monetary terms. In trading, the following conventional values are used to indicate lots.
1.00 lot = $ 100,000;
0.01 lot = $ 1,000.
Let's say you have a deposit of $ 1,000. You open a trade of 0.01 lots, in fact, you open a trade for $ 1,000 without leverage at all. If you open a deal for 0.02 lots, then this volume is already equivalent to $ 2,000, and in this case you use the 1: 2 leverage.
Novice traders are strongly advised to trade with a deposit of at least $ 1,000, lot 0.01, without using leverage. Such trading excludes the possibility of losing your deposit.
What is an item?
A point is the smallest change in price. This unit of measurement is used in stock trading.
Let's take an example, what is an item?
Example No. 1
To do this, take a pair of USDRUB (dollar ruble). The current price of one $ is 75.33, that is, 73 rubles 33 kopecks. However, when trading on Forex, you will see a different price: 73.3350, that is, 73 rubles 33 kopecks and 50 points (half a penny). If USDRUB rises from 73.3350 to 73.3355, then this change will be equal to 5 points.
It is important to take into account that the lot size that you specify when opening a trade affects the pip value. On average, when trading with a volume of 1.00 lot, the cost of a pip is $ 1. Depending on the instrument, the pip value may vary. You can always view the cost of a point on our website using the trader's calculator.
For example, you have opened a buy deal for the EURUSD pair with a volume of 1.00 lots. The price of the Euro at the moment is 1.09816, that is, 1 dollar 9 cents and 816 points. Suppose the price has risen 200 pips, from 1.09816 to 1.10016. Thus, you will earn $ 200.
Example No. 2
For example, you have opened a buy trade on GBPUSD (British pound sterling against the US dollar). The price of one pound is 1.25200 (1 dollar 25 cents and 200 points).
Suppose that when you open a trade, you have chosen a volume of 0.50, that is, each pip is worth $ 0.5. The quote price increased by 1000 points: from 1.25200 to 1.26200. Thus, you have earned $ 500.
What is spread?
Spread is a commission that is charged once when making a deal.
In fact, the spread is the difference between the buy price (Ask) and the sell price (Bid). Previously, you may have encountered a spread when exchanging currency at a bank.
For example, you want to buy dollars. The Central Bank exchange rate is 73 rubles, however, having visited several different banks, you see that banks are ready to sell you dollars only at a price of 74 rubles, while the bank buys dollars at a price of 72 rubles.
Thus, $ 74 is the Ask price (purchase price) and $ 72 is the Bid price (sale price). The difference between Bid and Ask is the spread, and the larger this difference, the more spread you pay.
You want to open a deal on the EURUSD pair with a volume of 1.00 lot, that is, 1 pip will cost you $ 1. You see 2 prices: 1.09800 (bid) 1.09805 (ask), the difference between the buy and sell price is 5 pips. With your volume, the commission will be $ 5.
StopLoss and TakeProfit
TakeProfit (from Russian "take profit") is a limiter that automatically closes a trade in profit when a certain price is reached. The price at which to set Take Profit is determined by the trader himself. This is necessary to fix the profit.
StopLoss (from Russian "stop losses") is a limiter that automatically closes a trade at a loss, it works similarly to Take Profit. This is necessary to limit the risks when trading.
Why use TakeProfit?
Forex is constantly changing as the market operates around the clock. Without proper control, you can miss out on profits by not closing the deal on time. In order not to get into such a situation, you can set Take Profit at the price at which you would like to exit the market.
For example, you bought Brent oil at $ 25.302 per barrel. You predict a price rise of $ 3, therefore, you need to set Take Profit at $ 28.302. Brent can reach this price at night, during the day and in the early morning. Therefore, so that you can go about your business, without the need for constant monitoring of your transaction in 24/5 mode, you set Take Profit at a price of $ 28.302. Once the Brent price reaches $ 28.302, your trade will automatically close in profit.
Why use StopLoss?
Anything can happen in the Forex market at any time. Of course, sharp price changes are extremely rare, but every investor and trader wants to protect themselves from losses. This is exactly what Stop Loss is for.
When you open a trade, thanks to Stop Loss, you don't have to worry about how much loss you can get. In fact, by setting Stop Loss, you limit your loss to a certain amount, which you yourself determine when opening a trade.
For example, you decided to open a sell trade on EURUSD. The current quote price is 1.10250, you set the Stop Loss at 1.10500. Since you have opened a sell deal, you get profit from the fall in quotation. Rising EURUSD, on the other hand, will cause you a loss. Suppose that at night, while you are sleeping, an event happened that had an extremely positive effect on EURUSD, so the price jumped up by 2,500 points at once: from 1.10250 to 1.12750. Without Stop Loss, you would have suffered a loss 10 times more: not 250 points, but 2,500.
How to calculate TakeProfit and StopLoss?
In order to calculate the value of Take Profit and Stop Loss in money, you need two values: the difference between the price of opening a trade, Take Profit and Stop Loss, as well as the size of your lot.
Example with EURUSD
Let's say you opened a buy deal at a price of 1.10250, with a volume of 0.10 lots. The cost of 1 pip is $ 0.10.
You have set Take Profit at a price of 1.11000, from the opening price (1.10250), the difference is 750 points. To calculate the potential profit, you need to multiply the number of points by their value 750 x 0.10 = + $ 75.
You have set the Stop Loss at 1.09750, from the open price (1.10250), the difference is 500 pips. We multiply the number of points by their value, we see the size of the maximum possible loss: 500 x 0.10 = -50 $.
Conclusion: Forex trading is not as risky as it seems. If you don't want to take a big risk, we recommend using a small lot and setting Stop Loss. If you do not want to monitor price changes all your free time in order not to miss a profit, then set Take Profit.