BASIC TERMS

BASIC TERMS

1.Leverage

Leverage allows traders to control (trade with) large amounts of money with a smaller amount of capital. This tool increases potential profits but also magnifies potential losses. For example, if you have a leverage of 100:1, you can open a position worth $100,000, even if you only have $1,000 in your account.

Leverage works like this:

·        If you invest $1,000 with a leverage of 100:1, you can trade up to $100,000.This leverage can dramatically increase profits but also losses. In case of losses, your funds can quickly deplete if the price moves against you.

 

2.Margem
Qual é a margem no forex?

Margin in forex is the amount of money a trader must deposit into their trading account as collateral to open and maintain a position. Margin allows trading with a larger volume than you could with just your own capital, thanks to the use of leverage. Margin is not a fee but a deposit that is reserved in your account to secure the position. The remaining funds stay in your account as free margin.

a)     Margin Level

Equidade = Account balance + unrealized profit or loss.

Margem Usada = Amount of margin reserved for all open positions.

·        Example: If you have an account balance of $10,000, opened a position requiring a margin of $1,000, and your current equity (considering unrealized profit/loss) is $9,500.

 

b)    Free Margin

·        The amount of capital available in the account to open additional positions or to cover potential losses.

 

Free Margin = Equity - Used Margin

 

How is margin calculated?

Margin depends on position size, leverage, and the current market price. The margin calculation formula is:

·        Position size: 1 lot (100,000 units of base currency)

·        Currency: EUR/USD

·        Rate: 1.2000

·        Leverage: 1:100

What is a safe margin level?

 

·        Margin Level above 100%:

Safe level. This means your equity exceeds the margin requirements.

·        Margin Level below 100%:

 Critical level. The broker may start closing positions (called Margin Call or Stop-Out).

Regras de segurança:

·        Keep the Margin Level always above 200%, ideally above 300%.

·        Set stop-loss orders to limit losses and avoid margin calls. Trade with appropriate position sizes and choose leverage that won't jeopardize your capital.

 

3. Swap and Commissions

Swap in forex is a fee or interest charged for holding a position overnight. This fee results from the difference in interest rates between the two currencies in the currency pair you’re trading.

 

 A swap can either be:

·        Credit (income) if you’re trading in favor of the higher interest currency.

·        Debit (fee) if you’re trading in favor of the lower interest currency.

Comissões are fees that brokers charge for executing trades. These fees are separate from spreads and can be fixed or percentage-based, depending on the trade volume.

 

Types of commissions:

a)Fixed commission per trade:

For example, the broker charges $7 per 1 lot (for both opening and closing).

b)Commission based on volume

For example, the broker charges 0.002% of the trade volume.

 

4.Spread

Spread is the difference between the bid price (the price at which you can sell the base currency) and the ask price (the price at which you can buy the base currency). This difference is expressed in pips and represents the trader's cost for executing a trade in forex. The spread is the cost you pay the broker for executing the trade and is usually embedded in the price you see when placing

A )Definition of Spread

 

·        Bid Price: The price at which the trader can sell the base currency in the pair.

·        Ask Price: The price at which the trader can buy the base currency in the pair.

·        Spread is the difference between these two prices. It’s the cost a trader must overcome to make a profit.

For example, if you trade the EUR/USD currency pair and the price appears as follows:

Preço de oferta: 1.2000

Pergunte o preço: 1.2002 In this case, the spread = 1.2002 (ask) - 1.2000 (bid) = 2 pips. This difference (spread) is the cost you must overcome for the trade to become profitable.

 

B) When are spreads higher?

Spreads may vary based on several factors, including:

a. Market volatility

·        During periods of higher volatility, when prices change rapidly (e.g., during economic reports, political events, or crises), spreads can widen.

·        High volatility causes liquidez (the number of traders willing to buy or sell) to decrease, leading to a wider spread.

Exemplo:During interest rate announcements or economic reports, such as the US employment report, the spread can widen as markets become nervous, and price movements may be quick and unpredictable.

 

b. Trading time

·        At the beginning and end of the trading day, when liquidity is lower, spreads may be wider. The markets are less active, and it’s harder to find counterparts for trades, leading to a larger bid-ask difference.

Exemplo: When the markets open or close, such as during the overnight trading hours, the spread may widen because traders are waiting for new information expected during the main trading hours.

 

c. Type of currency pair

·        Spreads are generally wider for exotic currency pairs and less liquid pairs, as well as for pairs involving less-traded currencies.

·        Major currency pairs (e.g., EUR/USD, GBP/USD, USD/JPY) tend to have lower spreads because they are the most traded and have very liquid markets.

·        Exotic pairs (e.g., USD/TRY – US Dollar and Turkish Lira, EUR/ZAR – Euro and South African Rand) usually have larger spreads due to lower liquidity and less frequent trading.

Example: EUR/USD may have a spread of 1-2 pips during a regular day, while exotic pairs like USD/TRY might have a spread of 50-100 pips due to lower liquidity and volatility.

 

d. Low market liquidity

·        If trading during times of low liquidity, the spread will be wider. Low liquidity typically occurs during holidays or weekends when markets are not fully operational, or when there are few traders in the market.

·        During these times, brokers cannot execute orders as quickly, causing the spread to widen.

Exemplo: At night, when the largest traders (from Europe or the US) are absent from the market, the spread may widen as there are fewer market participants, and traders must accept a larger bid-ask difference.

 

e. Market overlaps

·        When trading overlaps between major trading centers (e.g., London and New York), the spread tends to be narrower due to higher liquidity. During overlapping trading hours of the major trading centers, traders are more willing to accept orders at closer prices, reducing the spread.

C) Types of spreads

Spreads can be:

·        Fixed spreads: This type of spread remains stable and does not change regardless of market conditions. A broker offering a fixed spread guarantees that the spread will be the same throughout the trading day. Example: If a broker offers a fixed spread of 2 pips on EUR/USD, every time you trade this pair, the spread will always be 2 pips regardless of market volatility.

·        Variable spreads: This type of spread can change depending on market conditions. If volatility is high or liquidity is low, the spread may widen.

Exemplo: If a broker offers a variable spread on EUR/USD, it may be 1 pip during a normal day but may rise to 5 or 6 pips during an economic report release.

 

D) Spreads across different currency pairs

·        Major currency pairs (e.g., EUR/USD, GBP/USD, USD/JPY) usually have very low spreads because they are highly liquid. The spread on EUR/USD may be between 0-2 pips during a normal trading day.

·        Cross pairs (e.g., EUR/GBP, GBP/JPY) may have slightly wider spreads, usually between 1-3 pips.

·        Exotic pairs (e.g., USD/TRY, EUR/ZAR, USD/BRL) may have spreads of 50-100 pips or more because these pairs are less liquid and traded less frequently.

 

E) Example spread calculations for different currency pairs

·        EUR/USD: Bid price = 1.2000, Ask price = 1.2002 → Spread = 2 pips.

·        GBP/USD: Bid price = 1.3000, Ask price = 1.3003 → Spread = 3 pips.

·        USD/JPY: Bid price = 109.85, Ask price = 109.86 → Spread = 1 pip.

·        USD/TRY: Bid price = 7.5000, Ask price = 7.5050 → Spread = 50 pips.

In summary, the spread width indicates how much we are in the negative immediately after entering a trade. The closer the spread is to 0, the less we will initially be in the negative.