DICTIONARY AND EXPLANATIONS
MT4 - Metatrader 4
The platform/program that is mostly used to connect to the market. Also Algorithms is often programmed for MT4.
Broker/provider

The role of Forex broker is to:

  • Provide a secure, reliable platform that allows money managers and investors to interact.

  • Facilitate the trading activities of money managers within the realms of allowed regulations.

  • Facilitate the account keeping, deposits, withdrawal, and related activities.

  • Apart from a usual trading business platform, allow transparent review, feedback, rating, and related mechanisms for investors and money managers to select and interact with each other.

  • Our broker: Squared Financial, Dublin, Ireland

Drawdown
DrawDown is the account balance with regard taken to the open positions. A low DrawDown indicates less risk in trading but also less volatility and lower return.
  • Absolute DD: compared to initial balance

  • Maximal DD: largest DrawDown (measured in currency)

  • Relative DD: largest relative DrawDown (measured in %)

  • A typical Relative DD in different risk allocation​ is:

    • Very low risk: <10% 

    • Low risk: 10-15%

    • Normal risk: 15-20%

    • High risk: 20-30%

    • Very high risk: 30-50%

Equity and balance

Balance with open positions is called equity: The balance if you would sell all open positions. Equity can be either above or below the "balance" depending on the open positions total is plus or minus at the time.

Lotsize

Is the size of the position that you buy or sell. Like you buy 1 stock or 100 stock in the Stock market.  In the past, spot Forex was only traded in specific amounts called lots. The standard size for a lot is 100,000 units. There are also a mini, micro, and nano lot sizes that are 10,000, 1,000, and 100 units respectively. Lot Number of Units:

  • Standard 100,000

  • Mini 10,000

  • Micro 1,000

  • Nano 100

The change in currency value relative to another is measured in “pips”, see below, which is a very, very small percentage of a unit of currency’s value. To take advantage of this minute change in value, you need to trade large amounts of a particular currency in order to see any significant profit or loss.

Let’s assume we will be using a 100,000 unit (standard) lot size (1 lot). We will now recalculate some examples to see how it affects the pip value.

  1. USD/JPY at an exchange rate of 119.80(.01 / 119.80) x 100,000 = $8.34 per pip

  2. USD/CHF at an exchange rate of 1.4555(.0001 / 1.4555) x 100,000 = $6.87 per pip

In cases where the U.S. dollar is not quoted first, the formula is slightly different.

  1. EUR/USD at an exchange rate of 1.1930(.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip

  2. GBP/USD at an exchange rate or 1.8040(.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.

 

Pip

“PIP” stands for Point In Percentage. More simply though, a pip is what we in the FX would consider a “point” for calculating profits and losses.

 

The unit of measurement to express the change in value between two currencies is called a “pip.” If EUR/USD moves from 1.2250 to 1.2251, that .0001 USD rise in value is ONE PIP. A pip is usually the last decimal place of a quotation. Most pairs go out to 4 decimal places, but there are some exceptions like Japanese Yen pairs (they go out to two decimal places).

Important: There are brokers that quote currency pairs beyond the standard “4 and 2” decimal places to “5 and 3” decimal places. They are quoting FRACTIONAL PIPS, also called “pipettes.” For instance, if GBP/USD moves from 1.51542 to 1.51543, that .00001 USD move higher is ONE PIPETTE.

 

As each currency has its own relative value, it’s necessary to calculate the value of a pip for that particular currency pair. In the following example, we will use a quote with 4 decimal places. For the purpose of better explaining the calculations, exchange rates will be expressed as a ratio (i.e., EUR/USD at 1.2500 will be written as “1 EUR/ 1.2500 USD”)

 

Example exchange rate ratio:

USD/CAD = 1.0200. To be read as 1 USD to 1.0200 CAD (or 1 USD/1.0200 CAD) (The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency) [.0001 CAD] x [1 USD/1.0200 CAD] Or Simply

[(.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit traded.

Using this example, if we traded 10,000 units of USD/CAD, then a one pip change to the exchange rate would be approximately a 0.98 USD change in the position value (10,000 units x 0.0000984 USD/unit). (We use “approximately” because as the exchange rate changes, so does the value of each pip move).

Here’s another example using a currency pair with the Japanese Yen as the counter currency.

GBP/JPY at 123.00

Notice that this currency pair only goes to two decimal places to measure a 1 pip change in value (most of the other currencies have four decimal places). In this case, a one pip move would be .01 JPY. (The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency)[.01 JPY] x [1 GBP/123.00 JPY]. Or Simply

[(.01 JPY) / (123.00 JPY)] x 1 GBP = 0.0000813 GBP

So, when trading 10,000 units of GBP/JPY, each pip change in value is worth approximately 0.813 GBP.

Spread

The spread is the difference between the buy (also called bid) price and the sell (also called ask) price. Two prices are given for a currency pair. The spread represents the difference between what the market maker gives to buy from a trader, and what the market maker takes to sell to a trader.

If a trader buys any currency and immediately sells it - and no change in the exchange rate has happened - the trader will lose money. The reason for this is that the bid price is always lower than the ask price.

This spread is different compared to the bid/ask currency rates for online Forex investors, such as 1.2015/1.2020 - a spread of 5 pips.

In general, smaller spreads are better for Forex investors because a smaller movement in exchange rates lets them profit from a trade more easily.

Risk allocation

It means that every trade that is executed to the market thru our broker has a calculated risk. It is done by StopLoss, SL. If a trade goes in the wrong direction it will be automatically sold at a certain in advance set price. Our system is risk calculated in a basket with all trades together. That means that we always know the downside of the account and also risk in percent of the account balance. The risk allocation is your choice as a client.

 
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