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Forex Terminology

 

Below are some of the more frequently asked questions relating to commonly used forex terminology traders ask before starting to trade forex.

What is an ECN Broker?

IC Markets is a True ECN broker offering spreads from zero pips using an electronic communications network (ECN) which aggregates liquidity from over 50 different banks and dark pool liquidity sources to provide clients with direct access to the best available prices globally.

 

What does the term ‘Spread’ mean?

Spread is the difference between the BID and the ASK price of a currency pair. As IC Markets offers True ECN pricing our prices are variable meaning that spreads can change depending on liquidity and market conditions. IC Markets average EUR/USD spread is 0.1 pips, one of the lowest of any broker globally.

 

How many decimal places does IC Markets quote to?

IC Markets quotes all currency pairs to 5 decimal places. A pair quoted in 5 decimal places would appear as 0.00010 on the trading platform.

For example: If the AUD/USD moves from 1.04054 to 1.04064, the 0.00010 USD move higher represents a one pip move.

 

What are Rollovers/Swap Rates?

Forex contracts are traded in pairs, this means that there is a Buy and Sell transaction two different currencies with interest rates at the same time. If the interest rate of one currency with you have bought is higher than the interest rate of the currency that you sold, then you will earn interest or on the pair, this is known as (positive rollover). If the interest rate on the currency that bought is lower than the interest rate on the currency you sold, then the you will pay rollover interest, this is known as (negative rollover).

It is important to consider rollover costs when trading. Rollover interest amounts will increase/decrease as interest rates change, they are also dependent on your position size.

 

What is Hedging?

Hedging is when a new position is opened in the opposite direction of an existing position on the same currency pair.

For example: In order to hedge a long position of 1 lot on EUR/USD, you would need to Sell a 1 lot position also.

Hedging does not require any additional margin but in fact reduces the overall margin on the position as the positions now offset each other.

 

What is Leverage?

Leverage give you the ability to open a larger position than you would otherwise be able to. IC Markets offers a maximum leverage of 500:1, this means for every $1 that you have in your trading account you are able to open a position worth $500.

Leverage offers traders the ability to make larger profits from small price movements, and, at the same time, risk only minimal capital on a position.

It is however important to note that although leverage can substantially increase your profits it can also substantially increase your looses as well, it is for this reason you should have a good risk management strategy in place.

 

What is Margin?

Margin is the amount of money required in your account in order to open a position.

The margin amount is calculated by multiplying the current market price by the volume of the trade and dividing the resulting amount by the leverage applied to your trading account.

Margin is calculated using the following formulae:  Margin = [(Current Market Price * Volume) / Leverage]

By way of example:

Mary wants to open 1.0 (100,000 base currency) lots of AUD/USD at the current market price of 1.04020  with a  leverage of 100:1.

Mary would calculate her required margin as follows:

USD $1040.20 = [(1.04020 * 100,000) / 100]

Mary requires a margin amount of USD $1040.20 to open a position of one standard lot in size.

 

What is Free or Available Margin?

Is the margin amount that can be used to open a new position. The free margin amount is displayed inside the MetaTrader 4 trading terminal.

 

What is a Margin Call?

A margin call occurs when the balance of your account is not sufficient to be able to maintain the margin on your current open positions. If the market moves against you, you will need to deposit additional funds into your trading account to maintain your open positions or run the risk of your positions being automatically closed, this is known as ‘liquidation’. Your positions can be liquidated without warning so it is important to maintain sufficient margin in your account at all times to avoid this from happening.

 

What is a MAM/PAMM account?

Multi Account Manager (MAM) / Percentage Allocation Management Module (PAMM) Account types on the MetaTrader 4 platform are designed for Money Managers and professionals who trade on behalf of other investors and manage multiple accounts from a single easy to use interface. MAM accounts can also be used to manage multiple accounts that are operating different Expert Advisors (EAs). Our MAM / PAMM page explains the key features of these types of accounts and types of traders / money managers these accounts are best suited for.

 

What is an Expert Advisor (EA)?

Expert Advisors (EA’s) are automated trading programs developed for use with the MetaTrader 4 trading platform. Expert advisors work by generating Buy and Sell order based various technical indicators programmed by the EA developer.

 

What is a Virtual Private Server (VPS)?

A Virtual Private server is used to ensure that your trading platform keeps running 24/7. A VPS is commonly used by EA traders as it minimizes the chance of system downtime due to technology failures and power outages. IC Markets has is place cross connects to a number of recommended VPS providers globally meaning faster order execution speeds for EA traders.

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