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What is a pip?

The most common increment of currencies is the Pip. If the EUR/USD moves from 1.2250 to 1.2251, that is ONE PIP. If the USD/JPY moves from 89.52 to 89.53 that is ONE PIP.

The JPY currency pairs (like USD/JPY or EUR/JPY, etc) are shown with 2 numbers to the right of the decimal point, all other currencies are shown with 4 numbers to the right of the decimal point.

Some brokers will show 3 or 5 digits to the right of the decimal position.  For example, the broker could show EUR/USD moving from 1.22500 to 1.22510, and it still is just ONE PIP.

What is a lot?

1 standard lot is $10 per pip. 1 mini lot is $1 per pip. $ micro lot is $.10 per pip.

What is the spread?

The broker lists a bid and an ask price for a currency. The difference between the bid and ask price is called the spread. This is how the broker makes his money, from the spread.

 When you buy a currency, you pay the ask price. For example, the EURUSD  bid price might be 1.3627 and the ask price might be 1.3630. Notice there is a 3 pip spread between the bid and ask price. You would buy at 1.3630. But you sell as the bid price, so you would sell at 1.3627. So if you went in and then sold right away, you would loose 3 pips. This is the brokers fee.

Whether you win or loose, the broker always gets his pound of flesh (spread).

What is leverage?

You are probably wondering how a small investor like yourself can trade such large amounts of money. Think of your broker as a bank who basically fronts you $100,000 to buy currencies and all he asks from you is that you give him $1,000 as a good faith deposit, which he will hold you for but not necessarily keep. Sounds too good to be true? Well this is how forex trading using leverage works.

For example, if the leverage is 100:1 (or 1% of position required), and you wanted to trade a position worth $100,000, you broker would set aside $1,000, or the “margin”. So if you have $5,000 they may allow you to trade up to $500,000 of Forex.

What is margin call?

In the event that money in your account falls below margin requirements (usable margin), your broker will close some or all open positions. This prevents your account from falling into a negative balance, even in a highly volatile, fast moving market.

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