Still on Forex terms and concepts, we found more terminology that we think is also really important. Especially for Traders wanting to open their first account and taking their first steps in Forex. As such, in this article we will go through 4 more concepts that traders starting out should know.
Generically, a lot is measurement for a group of goods, that are alike, that are transacted in the market. In Forex, lots are the standard measurement in trading when placing orders.
One lot represents an order of 100.000 units. This means that you would be buying/selling 100.000 units of the base currency while selling/buying 100.000 of the quoted currency.
Subdivisions of a lot are also common. Namely mini lots and micro lots, which ate composed of 10.000 and 1.000 units respectively.
Being leveraged consists of contracting debt for whatever investment strategy a trader might have. It is mostly used as a way to aid and amplify a trader’s position on any type of financial asset. If a Trader opens an account with a leverage factor of 250:1, this means that for every euro he holds, he can control up to 250 euros. One can refer to this account as being highly leveraged.
It is important to point out that a common misperception is that having more leverage means that trading forex is riskier and thus should be completely disregarded. This is should not be the case. Traders should be aware of both sides of the coin.
The major benefit is that you can make much larger gains with a small investment. However the other way around also applies. Losses are amplified when the trade is leveraged.
So, taking this into consideration, if that added capital to your account is controlled, it will enable you to trade more currency pairs, a higher lot, and diversify your Portfolio.
Margin and leverage are two terms that refer to borrowing money. So, they might appear to be very similar. However, they should not be confused, as they are two different concepts.
If you have margin, this means you can borrow money from your broker at a fixed interest rate to invest. The act of borrowing the money with this purpose is to have a margin, whereas being leveraged is just having debt.
Simply put, if you are trading on a margin you have to be necessarily leveraged but the other way around might not be true. This because you can have leverage for a different purpose than to acquire financial assets.
In Forex, these depend on the type of account you open with your broker. The most basic accounts that brokers usually offer don’t have any commissioning per negotiated lot, only a spread associated with trading.
Both “Pro” and “ECN” accounts, however, typically have commissions associated with each trade, with the added benefit of tighter spreads, being must more advantageous for Traders with more capital.
Moreover, it is also advised to take into account the spreads offered by brokers. More importantly, on the currency pairs that you normally trade as a few pips can make a difference in big lots.
To Sum Up
When first starting out, educating yourself is fundamental. Like we said in the previous article, there are many more concepts out there. As such constantly reviewing the ones you know and adding more to your vocabulary is a definite plus.
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