Glossary

Ask is the offer price, i.e. the best price at which the contract can be bought at that moment. The trader typically pays a price slightly above the current market price.

The first member of the pair is called the base currency, while the second member is called the quote currency. In trading, the base currency is always bought or sold against the quote currency. In the EURUSD pair, the euro is the base currency and the dollar is the quote currency.

Trading in foreign currencies occurs in pairs. During trading, one currency is always exchanged for another. The currency market convention generally determines which currency is quoted against another. For example, in pairs like EURUSD, the euro is typically the base currency.

Leverage allows you to trade in a much larger volume than the money available in your trading account. Leverage allows us to make larger transactions, so our profits can be higher; however, our losses can also be greater if we do not use it wisely.

Calculation of Leverage

Let’s take an example of a transaction where we want to open a long position of 1 lot (i.e. 100,000) EUR/USD. To be able to enter into a transaction of this size, we would need to have €100,000 of own capital, because without leverage, this is how much margin would be required for a transaction of this size. This margin requirement is created in the first member of the currency pair, the so-called base currency. If, for example, we have 1:100 leverage in our account, we only need to deposit 1/100th of the €100,000 (this is done for us by the brokerage firm’s IT system). In other words, only €1,000 of margin is needed to take 1 lot of positions.

A lot is a unit of quantity that expresses the amount you place an order for, how much you buy or sell from the base currency. In the foreign exchange market, a standard lot is 100,000 units of the base currency bought or sold. For example, if you take a long position in the EUR/USD pair with a lot size of 1, you are effectively buying 100,000 euros with dollars.

In forex trading, margin refers to the amount of money that a trader must deposit to open and maintain a leveraged position. It acts as a form of collateral or security deposit that the broker holds until the position is closed. Margin allows traders to control larger positions in the market with a smaller amount of capital.

Margin is not a cost but a portion of the trader’s equity set aside by the broker to cover potential losses. For example, with a 1:100 leverage, a trader can control a position worth $100,000 by depositing only $1,000 as margin. If the trade moves against the trader and the account balance falls below a certain level, the broker may issue a margin call, asking for additional funds to keep the position open. If the trader cannot meet the margin call, the broker may close the position to limit further losses.

When you place a market order, you will buy or sell at the best available price. With market orders, slippage can occur, and you always have to pay the spread. Slippage often occurs during spikes in turnover.

In currency pairs, the pip is the unit of exchange rate change. The unit change in the fifth digit of the exchange rate is called the pip – this includes decimal places.

If the cross rate for EURUSD is 1.29658 and the exchange rate moves up by 2 pips, it will be 1.29678.

If the USDJPY cross rate is 109.156 and the rate moves up 1 pip, it will be 109.146.

The tenth part of the pip is called the dot or tenth pip, it is the 6th digit in the exchange rate.

The price movements of currencies are always calculated in pips, and as each currency has its own value (exchange rate), the value of the pip for each currency is different.

Determining the expected return and the target price is part of the trading strategy, and it measures whether or not it is worth opening a position, how much you are risking compared to how much you can gain.

For example, if you risk $100 to win $300, the risk/reward ratio is three to one. The higher the Risk-Reward Ratio, the lower the hit ratio you need to be a profitable trader.

The scaling plan gives traders the opportunity to increase their account size (up to a capital allocation of $10 million at Hexa Prop).

The band between the bid and the ask is called the spread. The spread is the cost that the trader must take into account when trading.

Stop loss plays an important role in risk management. It is the protection that allows you to set a maximum loss limit, i.e. if the position turns into a loss, the system will automatically close the trade when the predefined price level is reached.