ForEx (Foreign Exchange)

XTB’s Interpretation

FX or foreign exchange – is the exchange of one currency for another at an agreed price.

Forex is open 24 hours a day, five days a week (Monday to Friday). It opens on Monday morning in Wellington, New Zealand, before progressing to the Asian markets in Tokyo and Singapore. Next, it moves to London before closing on Friday evening in New York.

Even when the market is closed from Friday to Sunday, there is always something happening that will take its toll on various currencies by the open on Monday.

Exchange rate for GBP/USD (base/counter) is $1.45. This means that for every 1 pound you exchange, you’ll get $1.45 in return.

Buy/Ask: go long | Sell/Bid: go short

TraditionalLeverage
Lot10000 10000
Price280p 280p
Leverage5:1 (20%)
Cost £28,000 £5,600
100 pence (p) to the pound (£)

A pip stands for ‘percentage in points’.

GBPUSD moving from 1.2545 to 1.2546 is a movement of one pip

one pip in the USDJPY pair is equivalent to a move in price of 0.01 e.g. 1.2545 to 1.2645

using lot size to set the volume of your trade

1 lot (1.00 Volume) transaction on the EURUSD gives a pip value of £7.62 (see in xStation 5 when open ticket)

difference between the ask and bid price is called the spread

EURUSD at 1.13956/1.13961 mean that the bid price is 1.13956 and the ask price is 1.13961, giving a total spread of 0.00005 or 0.5 pips.

Long: your position will be opened on the ask price and closed on the bid price (inverse for Short)

In order to calculate the pip value per 1 lot, you need to multiply the ‘Nominal Value of one lot‘ with the ‘Size of one PIP‘ and the value will be in the quoted currency:

  • 100000 x 0.0001 = 10 USD

This means that if you opened a 1 lot transaction on the GBP/USD and the market moved 100 pips in your favour, you would make a profit of $1,000 (10 USD x 100 pips).


When opening a trade, you will need a certain amount of outlay. This is known as margin. The margin is not a cost, but is an amount of money that is frozen when you open a position and returned to you once the transaction has been closed. It’s important to know what amount the margin will be so you can evaluate not only the risk itself, but also calculate whether the remaining funds will allow you to open additional positions.

Remember that with CFDs, you only need a fraction of the nominal value to be able to open a position. For example, with a leverage of 30:1 you’d only need 3.33% of the nominal value for the margin of the transaction. A typical leverage for FX is 1 to 30, which means that you’d only need 3.33% of the nominal value of the margin.

This allows you to potentially generate a higher return on the invested capital, but also makes the risk greater, meaning that you may need to deposit additional funds to cover your position. You will also suffer greater losses if the position moves against you.

Let’s say you’d like to open a 1 lot transaction on GBP/USD with leverage of 30:1, but you don’t know what the nominal value per lot is for this instrument. This information can be found in the instrument specification table.

On the GBP/USD, the nominal value per lot is £100,000. If the leverage is 30:1, you only need 3.33% for the margin of this trade, calculated in the base currency of the pair. Therefore, you need £3,333.33 for the margin of a 1 lot transaction.

From a risk management point of view, margin is very important and the general notion is that traders should not enter trades with a margin higher than 30% of the total invested capital.

Let’s return to the above example. Let’s say your initial capital is £5,000 and you would like to open a 1 lot transaction. In that case that would represent 66.67% of your total capital, because the required margin with a 30:1 leverage would be £3,333.33.

XTB end at this point


In order to start trading forex, you need to open an account with a retail forex broker or CFD provider.

Balance

Account Balance” or “Balance” or “Deposit” measures how much cash you have in your account.

Swap

The procedure of moving open positions from one trading day to another is called a rollover. During this rollover, a swap (FEE that is either paid or charged to you at the end of each trading day if you keep your trade open overnight) is calculated.

Profit/Loss

Unrealized P/L a.k.a. “Floating P/L” (has green or red numbers beside them) refers to the profit or loss that would be “realized” if all your open positions were closed immediately.

Your account is in USD
You are currently long 10,000 units EUR/USD, bought at 1.15000.
The current exchange rate for EUR/USD is 1.13000.

Floating P/L = 10,000 x (1.13000 – 1.15000) = -200 

The position is down 200 pips.
Since you’re trading a mini lot, each pip is worth $1.
So you currently have a Floating Loss of $200 (200 pips x $1).
If EUR/USD rose to 1.16000, you would have a Floating Profit.
The position will then be up 100 pips. (/w Floating Profit of $100)

Realized Profit/Loss is profit/loss that comes from a completed trade.
i.e. your profits/losses become realized when positions are CLOSED.

Margin

Margin (small amount (a %) of the “full position size”) gives you the ability to enter into positions larger than your account balance. 

For example, if you want to buy $100,000 worth of USD/JPY, you only put up a portion, like $3,000 (actual amount depends on your broker).

Once the trade is closed, the margin is “freed” or “released” back into your account and can now be “usable” again… to open new trades.

Notional Value e.g. If we own 100 shares of stock at $50.00 per share, we have $5000 of Notional Value at risk.

Depending on the currency pair and broker, the amount of margin required to open a position VARIES (e.g. 0.25%, 0.5%, 1%, 2%,…)

Some examples of Margin Requirement for several currency pairs:

Currency PairMargin Requirement
EUR/USD2%
GBP/USD5%
USD/JPY4%
EUR/AUD3%
Example #1-1Deposit $1,000Long 10,000 units USD/JPY
mini lot is $10,000Margin Requirement is 4% Required Margin will be $400 (4% fof $10,000)
Example #1-2Deposit $1,000Long 10,000 units GBP/USD at 1.30000 exchange rate10,000 units is 10,000 poundsPosition’s Notional Value is $13,000Margin Requirement is 5%Required Margin will be $650 (5% of $13,000)

If you open more than one position at a time, each specific position will have its own Required Margin.

If you add up all of the Required Margin of all the positions that are open, the total amount is what’s called the Used Margin.

Example #2

  • Deposited $1,000 
  • Long 10,000 units USD/JPY position
    • Margin Requirement 4%.
    • Notional Value $10,000
    • Required Margin $400 ($10,000 x 4%)
  • Long 10,000 units USD/CHF position
    • Margin Requirement 3%.
    • Notional Value $10,000
    • Required Margin $300 ($10,000 x 3%)
  • Used Margin $700 ($400 + $300)

Equity = Balance + Floating P/L

Free (Usable) Margin = Equity – Used Margin

Example #3

  • Balance of $1,000
  • Long 10,000 units USD/JPY
  • Margin Requirement is 4%
  • Notional Value $10,000 (USD base so no need factor exchange rate)
  • Required Margin $400 (4% of $10,000) = Used Margin
  • Floating Profit $10
  • Equity $1,010 ($1,000 + $10)
  • Free Margin $610 ($1,010 – $400)

Margin Level

Margin Level allows you to know how much of your funds are available for new trades. The higher the Margin Level, the more Free Margin you have available to trade.

Margin Level = (Equity / Used Margin) x 100%

Different brokers set different Margin Level limits, but most brokers set this limit at 100%. This means that if the Margin Level is 100% or less, you will NOT be able to open any new positions.

If you want to open new positions, you will have to close existing positions first.

Example

  • Balance $1,000
  • Long 10,000 units USD/JPY (Notional Value $10,000)
  • Margin Requirement is 4%
  • Required Margin $400 (4% of $10,000) = Used Margin
  • Equity $1,000 ($1,000 + $0 floating P/L)
  • Margin Level 250% ($1,000/$400)

Margin Call

Margin Call is when Margin Level reached a specific level/ threshold.

When this threshold is reached, you are in danger of the POSSIBILITY of having some or all of your positions forcibly closed (or “liquidated“).

Margin Call occurs when your floating losses are greater than your Used Margin.

This means that your Equity is less than your Used Margin (since floating losses reduce your Equity).

Margin Call occurs when: 

Floating Losses > Used Margin (i.e. Equity < Used Margin) 

Example

  • Broker has a Margin Call Level at 100% 
    • Balance $1,000 
    • Open 10,000 units USD/CHF position with $200 Required Margin.
  • You’re now down 800 pips (At $1/pip, so Floating Loss $800)
    • This means your Equity is now $200 ($1,000 – $800)
    • Margin Level 100% ($200/$200 in %)

Stop Out Level

Stop Out Level is when your Margin Level falls to a specific percentage (%) level in which one or all of your open positions are closed automatically (“liquidated”) by your broker starting with the most unprofitable one until your Margin Level is back above the Stop Out Level.

Stop Out Level is when the Equity is lower than a specific percentage of your Used Margin.

Example

  • Your forex broker has a Stop Out Level at 20% (i.e. when Margin Level reaches 20%)
  • You’re now down 960 pips ($1/pip, so Floating Loss $960)
    • Equity $40 ($1,000 – $960)
    • Margin Level 20% ($40/$200 in %)
  • At this point, your position will be automatically closed (“liquidated”).
  • When your position is closed, the Used Margin that was “locked up” will be released and become Free Margin.
  • Your floating loss of $960 
  • your new Balance (Equity and Free Margin) will be $40!
Margin Call LevelStop Out LevelStop Out
Margin Level100%20%
Equity$200$40$40
Used Margin$200$40
Free Margin$0$0$40
Balance$1,000$1,000$40
Floating P/L-$800-$960

If you had multiple positions open, the broker usually closes the least profitable position first. Each position that is closed “releases” Used Margin, which increases your Margin Level.


Reference

  1. XTB – Trade your way. (n.d.). Retrieved August 16, 2021, from https://www.xtb.com/en/learn-to-trade/what-is-forex
  2. XTB – Trade your way. (n.d.). Retrieved August 16, 2021, from https://www.xtb.com/en/learn-to-trade/basic-terms-and-vocabulary