Are you a veteran in the field, or have you just started a new career in the Financial Services industry? Regardless of your experience level, it's always good to go over the basics of our industry from time to time, so here is our refresher/introduction course of the most commonly used terms in the world of online trading.
The best place to start is a quick look at what we mean exactly when it comes to forex and online trading.
Forex stands for "Foreign Exchange" and refers to the process of buying or selling one currency against another in the expectation of realizing a monetary profit from the change in exchange rates between the two currencies.
Forex assets are quoted and traded in currency pairs, so for example, the EUR/USD would be the exchange rate between the Euro and the United States Dollar.
At the going rates at the time of writing, a price quote for the EUR/USD would look like this:
EUR/USD - 1.2100
That means that One Euro is currently worth 1.2100 United States Dollars. Sell €1,000, and you'll get $1,210.
So far, so good.
So how do we make a profit trading forex? Let's stick with our EUR/USD example for a while and walk through a trade.
Assuming we believe the value of the EUR will increase against the USD, we would BUY the pair. For the sake of the example, let's say we BUY 10,000 units of EUR/USD (more on trade amounts later).
So, we know OWN €10,000, but we OWE the markets $12,100.
The value of the EUR increases, and the EUR/USD quote is now 1.3100.
We now close the position, which involves SELLING the EUR we own and BUYING back the USD we owe. Our €10,000 are now worth $13,100, so we make a profit on the trade of $1,000.
Forex is characterized as an OTC (Over The Counter) market. That is to say, there is no central exchange, and the market is made up of brokers, banks, hedge funds, and institutional and private investors. By far, it is the most liquid market globally, with average daily traded volumes of over $6 trillion.
Let's take a look at some of the most common terms used in the financial industry among the various departments that make up a typical forex broker.
Sales Department
The first point of contact between a potential client and a broker is the Sales (or Conversion) team. Potential clients are referred to as Leads and have submitted their information to the broker, regardless of how these individuals came to submit their details. Anyone who submits details but does not yet have a verified trading account is known as a Lead (or Partial User).
The sales department is responsible for contacting these leads and converting them into clients. That involves the lead creating a trading account and making the first deposit into this account. This first deposit is known as an FTD - First Time Deposit.
While forex is an OTC market, there are strict protocols and regulations to follow, and these involve the next step in the process, which is Compliance. Compliance is responsible for ensuring a client completes the KYC and AML procedures.
KYC stands for Know Your Client and involves collecting documentation from a client confirming their identity and address. The usual documentation required here is a photo ID and a recent utility bill. These two documents establish the identity and address of the client. Without these documents, clients will not be allowed to trade as there is potential for fraud, using a stolen credit card, for example.
AML stands Anti Money Laundering and is a process whereby financial institutions prevent any possible attempts at money laundering and take the necessary steps to report any such attempt to the relevant authorities.
One other level of compliance came into play with the introduction of the GDPR (General Data Protection Regulation) in 2018, which regulates the privacy rights of EU citizens in regards to their personal data.
While this might all sound complicated (and it is!), the Antelope CRM's compliance modules offer outstanding functionality for all these procedures, with customizable automated rules in place to ensure all compliance with all relevant regulations.
Retention Department
So far, a lead has been converted into a client and verified by compliance. The next stage in the process is Retention. The retention department is responsible for maintaining the client's relationship with the broker. Brokerage fees come from trading volumes, so ensuring a client has all the support, training, and educational resources is an important step. Once a client is in the retention process, their first deposit after their FTD is known as the FRD - First Retention Deposit.
Retention is tasked with ensuring the client has sufficient funds in their account to maintain their open positions, aware of any promotions the broker might be running, or even any changes to trading conditions (holidays, for example).
The retention department is also responsible for walking new traders through the trading platforms. We'll concentrate on MetaTrader 4, one of, if not the most widely used trading platforms in the industry.
Below are some of the key terms related to trading on MetaTrader 4:
Leverage
Leverage is the ratio of capital used in a transaction to the funds deposited in a client's trading account. Trading at 1:10 leverage, for example, and having an available balance of €1,000 would allow the client to trade positions of up to €10,000. The use of leverage magnifies profits (and losses) on trading. Trading with leverage only requires a client to make a small deposit, known as margin. This margin is the amount of free funds necessary to open and maintain a position.
Pip
Pips are the units used to measure the movement in a forex pair.
A forex pip usually refers to a change of the fourth decimal place of a currency pair.
Liquidity
A measure of the ease with which an asset can be bought and sold quickly, at stable prices, and converted to cash.
All forex quotes are quoted with two prices: the "bid" and "ask." If you want to buy, you use the "ask" price. If you're going to sell, you use the "bid" price.
So "ask = buy" and "sell = bid".
Spread
In forex trading, the "spread "is the difference between the buy and sell prices quoted for a forex pair.
Trade Sizes
Forex is traded in specific amounts called "lots," which are basically the number of currency units you will buy or sell.
A Standard Lot is 100,000 units of the base currency, that is to say, the first currency in a forex pair. One Standard Lot of EUR/USD, for example, is equal to €100,000. Sub-divisions of Standard Lots are also available, such as Mini, Micro, and Nano, equivalent to 10,000, 1,000, and 100 units of the base currency.
The standard size for a lot is 100,000 units of currency, and now, there are also "mini," "micro," and "nano" lot sizes that are 10,000, 1,000, and 100 units.
Swap
A "swap," also known as "rollover fee," is the fee charged when a position is kept open overnight. For forex, the formula to calculate swap is as follows:
Swap = (Pip Value * Swap Rate * Number of Nights)/10.
Our success managers are here to help, so feel free to reach out to us, and we'll be happy to help with any questions you may have.
