If you are new to trading, the following definitions and examples will help you to get familiar with the rules and guidelines of the forex market. This short overview to enhance your existing knowledge.
Financial Instruments
These include Currency Pairs (forex), CFDs in Indices, Commodities and Spot Metals. All instruments are speculative and complex by nature, and traders must be familiar with the associated risks. A large selection of educational material is available on the FXTM website to help you familiarize yourself with the terminology and trading tools used in the financial markets.
Leverage & Margin
Leverage is offered by brokers to maximize traders’ buying power by giving them the ability to deposit a small amount of funds and trade larger volumes. Leverage is expressed in ratio form, so if it is 1:100 for example, a trader’s buying power is magnified 100 times. It can either maximize the profits or the losses of a trade.
Margin: Since the trader is allowed to use more capital (due to leverage) than the amount he or she deposited, the broker requires that a set amount of funds remains in your account, to maintain an open position.
The leverage and margin you’re eligible for with FXTM is based on your trading knowledge and experience.
To calculate your margin as it relates to your leverage, please use the Margin Calculator.
Fundamental and Technical Analysis
Fundamental Analysis studies risk-related factors such as the economic, political and environmental forces that cause prices to move up, down or sideways.
Technical Analysis is the study of prices for the purpose of identifying the market’s direction. The principles of technical analysis are:
- All known fundamentals are reflected in the price charts.
- Prices move in patterns referred to as trends.
- Price patterns that worked well in the past are expected to work again in the future.
Risk Management
There are certain risks associated with trading. As with any financial contract, the inherent risk of the institution or party you have the contract with, is known as ‘Counterparty Risk.’ Counterparty risk is the risk that one of the members of the contract will not fulfill its contractual obligations.
Another type of risk comes from Market Forces, which are determined by the economic factors affecting the price of the financial instrument in question. For example, if you believe that your base currency is going to increase in value against the quote currency and unexpected political turmoil forces the base currency down, you risk losses.
How FXTM helps you to Manage Risks
Margin Call – is a signal from a broker that your account has exceeded the required margin in terms of percentages. In other words, there is not enough equity in the account to continue to support your open positions.
Take Profit – A price level that you set on your trading platform that locks in potential profits. Example: If you buy 1000 EUR at the exchange rate of 1.20000 EUR per USD, this equals to 1,200 USD (1000 X 1.20000).
If a take-profit order is placed at 1.30000, and the price rises from 1.20000 to 1.30000, the take-profit order closes your position for a profit of a 100 USD.
Stop Loss – A price level that you set on your trading platform, designed to protect your capital from price movements in the opposite direction. Example: if you trade the EURUSD and you put the stop loss at 1.27000, as soon as the EURUSD falls under 1.27000, your open position will be closed.
Stop Out – the level at which a trading platform will start to automatically close your least profitable positions in order to prevent any additional losses, in case of a significant price movement in the opposite direction.
