Now let me explain…
To put it simply, when you say that “I’m long EUR/USD.”
It means that you are referring to the trade direction.
You’re bullish on EUR/USD, and you want EUR/USD to go up because that’s where you’ll make a profit.
If you are short, it means that you want the market to go down so you can make a profit.
This means that you have a bearish bias.
Leverage & Margin
Leverage refers to how much more you can trade relative to your account size.
For example, let’s say you have a $10,000 trading account.
And you are using a leverage of 1:10.
This means you can control 10x more than your initial capital.
This means that your broker lets you trade up to $100,000 worth of currency.
This is what leverage means.
The margin is another way of looking at leverage.
If you take 100/10 (leverage), your margin requirement is 10%.
So, if you want to trade $100,000 worth of currency, you’re only required to put 10% of your margin which is $10,000.
One thing to point out is that leverage is a double-edged sword.
You can make more in trading, but at the same time, you can lose more.
For example, let’s say that you have a $10,000 and you are using a 1:10 leverage of $100,000.
And let’s say you want to buy shares of AAPL which is currently valued at $100 per share.
When AAPL shares rise to $110 and you are trading without leverage, you have made a gain of $1,000.
But if you are using leverage, you have made a gain of $10,000.
If you put it into perspective in percentage terms…
What happens is that without leverage, you have made a return of 10%
But with leverage, you have made a 100% return of your money.
This might look good and sounds really awesome!
But I want you to take note that what happens if the shares of AAPL drops by 10%?
From $100 down to $90 per share.
Without leverage, you would lose $1,000
But if you are trading with leverage, you would lose $10,000
Essentially, you have wiped out your trading account if the shares of AAPL drop 10%.
This is why I say that leverage can be a double-edged sword.
And you want to use this with responsibility.
If you want to learn more about leverage and how to position size your trade (which is advanced stuff) you can check out the article here.
A pip stands for Point in Percentage.
For most currency pairs such as the major currency pairs, it is the 4th decimal place.
For example, let’s say EUR/USD is trading at 1.2511
And it moves up by 2 pips.
What this means is that EUR/USD has moved up to 1.2513, but for the JPY currency pairs, it is slightly different.
Let’s say USD/JPY is trading at 120.10 and it drops 5 pips...
Now, USD/JPY is trading at 120.05!
So, bear in mind that pip refers to the smallest price move in the currency pair.
One thing to note is that some brokers also have “pipette.”
And 1 pip is equal to 10 pipettes.
The Bid refers to the price that you can sell at.
The Ask refers to the price that you can buy at!
Whenever you are trading Forex or Stocks, it’s not just one price.
It’s always two, the bid and the ask.
For example, EUR/USD is trading at 1.2001/1.2003 (Bid/Ask).
The higher value is always the Ask, and the smallest is always the Bid.
If you want to Long (buy) right now, you would look at the Ask price (1.2003).
If you want to Short (sell) right now, you would look at the Bid price (1.2001).
The spread is the difference between the Bid and Ask.