1. The Power of Words
They say that knowledge is power and in the case of trading, that’s most definitely the case. You might be surprised to find out that learning trading strategies and economic phenomena are not the only things that can help you on your path to success. Understanding the investing and trading lingo is a crucial element of success. Just like any other language, it exists to make complex ideas easy to understand. In this article, we will be looking at the most frequently used terms you will run into when you start trading with Banxso, so you can spend less time learning and more time doing when it comes to the market!
“Understanding the investing and trading lingo is a crucial element of success.”
2. Status Bar Elements
Balance
One of the first things you might want to see the first time you open up your account is where your own money is. Your capital is represented by the Balance, which you can always check by clicking on the account picker in the top left. Your Balance represents your money, sans the open position profits or losses you may have. In other words, it’s the static representation of your account’s worth.
Did you know? Your Balance can change in only three ways:
When you close an open position.
When you deposit money into your account.
When you withdraw money from your account.
Equity
Equity is the third element to the right of the account picker, and it shows you exactly how much your account is worth at the moment with open positions in mind. How is that different from the Balance? If you are on a profit of $200 from one of your trades, your Equity is going to be larger than the Balance by that much. As soon as that position is closed, that profit will be reflected in the Balance and both Balance and Equity will become equal. Think of Equity as the dynamic representation of your account.
P&L
Profits and losses come from open positions. They are not permanent until a position is closed. The P&L can fluctuate up and down and that will affect your current Equity—which takes them into account—but will not change your Balance until you decide to close those positions. That’s why P&L is often referred to as running P&L or unrealized P&L. If a position is on a loss, it can surely reverse and become profitable, and vice versa. Knowing when to close out a position is the real mastery of trading.
“Profits and losses are not permanent until a position is closed.”
Free Margin
The Free Margin field is where you will see your available funds. By available, this means funds which you can use to open new positions with, and which can be used as a buffer against negative market movements in your open positions. If you have running losses, your Free Margin will decrease, while if you have profits, it will increase. Every time you open a new position, a chunk of that Free Margin will be reserved for that position, so it will decrease again.
Used Funds
Used Funds is where all that ‘locked’ capital goes to keep your positions open. Every position you open will require a certain amount of money, depending on the size of the order, which is put aside to guarantee that position on the market. That money is currently unavailable to use for anything else and the combined amount for all of your open positions will sit under the Used Funds field.
Margin Level
If you were wondering how you can understand your account in a more simplified way, you’re going to love this one. It’s called the Margin Level, and it shows you a percentage that tells you how ‘healthy’ your account is. The higher the percentage you see is, the more Free Margin you have in your account. This means two things. If you have lots of Free Margin, you are safer on the market because you have more money to sustain your open positions, but it can also mean you are underutilizing your account’s potential by having less money locked in open positions working for you.
Did you know? Even though the Margin Level is a percentage, it doesn’t stop at 100%. As a matter of fact, some accounts can have Margin Levels of 200%, 500% and even over 1,000%, meaning they are well maintained. If the Margin Level falls to 100% or below, dangerous account events can occur!
Key Takeaway Box:
- Understanding trading terminology is crucial for success.
- No profit or loss is final until you close your position.
3. Trading Terminal Elements
Lot
Much like the pip, the lot is what traders use to indicate size without having to specify whether they are talking about bushels of wheat, Japanese Yen, ounces of gold, or barrels of oil. Lots come in three sizes: standard, mini, and micro. For Forex, they equal respectively 100,000, 10,000, and 1,000 units of the base currency. A lot equals different amounts for every other asset on the platform. Think of lots as a standardized unit of measuring size.
Pip
Understanding the elements that make up your account is vital, and so is understanding how traders measure trading sizes and price changes on the market. A cornerstone term in that regard is the pip. A pip represents the smallest movement a Forex pair can make. Just like in real life, prices never increase by half a cent, always by at least one. In Forex, the pip is usually the fourth digit after the decimal point, except for pairs with the Japanese Yen, where it falls on the second digit instead. Think of the pip as a standardized unit of price change.
Leverage
The crown jewel of Banxso’s platform is trading tool called Leverage. Leverage is what allows you to open positions on the market with amounts much smaller than the ones you are controlling. You don’t need to do anything to take advantage of it, it’s already there! When you click on a Forex pair, for example, you will automatically be able to use 1:200 leverage, which increases your buying power 200 times. Click an asset, choose a lot size, and you will see exactly how much your required margin is for that position. Leverage is what sets trading apart from investing and allows you to make sizeable profits even with little.
Risk Assessment Tip:
Consider that higher leverage can lead to higher rewards but also higher losses. Just because you can open a large position with a smaller amount doesn’t necessarily mean it’s a sound trading decision. Assets with higher volatility are usually traded with a comparatively smaller leverage but that doesn’t mean that an asset with relatively smaller volatility and a large leverage cannot experience huge price swings due to unforeseen circumstances. Weigh in your options and decide on a trading size that fits your trading strategy and is within your tolerance for possible losses.
Spread
Working with any financial institution, you will inevitably end up paying for a service they provide. Either you will have to pay to deposit, withdraw or exchange money in a bank, or pay your monthly management fee for your credit card, or your maintenance fee in the mutual fund. The question is, ‘How does Banxso make money?’. Since Banxso is a commission-free brokerage, we will never charge you a commission for opening or closing a trade on the market. Other brokers might charge you a flat amount every time you enter and exit, which could lead to huge expenses in the long run.
Instead, with Banxso, every time you open a position, it starts on a slight loss. That’s because for each asset on the market, there are two prices – the buy and the sell price. There is a tiny difference between the two prices—just like at an exchange bureau—which is known as the spread. It is measured in pips. Remember, the spread is not taken out of your balance! If you’re trading EUR/USD and the spread is 2 pips, a micro-lot position will set you back just $0.2. The spread is only a loss if you open a position and close it immediately. For example, that $0.2 unrealized loss will become a realized loss.
Required Margin
Alright, so you can take advantage of the tool leverage to control larger trade sizes than your capital allows but what amount of money do you need to open a position then? For your convenience, you can see that easily under ‘required margin’. That’s the amount of money in your account you need to set aside to open a position with the chosen size. For example, if you want to open a position of 1,000 EUR/USD, you will need 200 times less than that in your account—5€. That’s only $5.47! When you have multiple positions open, their combined required margin will be shown under ‘Used Funds’, so you can see how much of your total account is locked into open trades.
Key Takeaway Box:
- You don’t need to have the full worth of an asset to open a position on it.
- Spread isn’t a commission taken out of your balance.
4. Account Events
Margin Call
Trading can be fantastic but it’s not all peaches and cream. If you are not careful or if the market simply goes against you for too long, you might end up in a less-than-perfect situation. Do you remember the Margin Level we mentioned? To be safe, that level should always be over 100%. What happens if it hits that level? An event called Margin Call occurs. When you have no Free Margin in your account left, your Equity is equal to your Used Funds. In that situation you cannot open any more new positions and you will receive a notification. You have three choices: keep your positions active and hope for a reversal, close positions to free up some margin, or deposit more funds to directly increase your Margin Level.
“To be safe, your margin level should always be over 100%.”
Stop out
Let’s say that you decide to not close any positions or deposit more money into your account and despite your strong hopes, the market continues to go against you. What happens then? Unfortunately, if that happens and your Margin Level keeps going down, you are in danger of a Stop Out. That event occurs at 30% Margin Level, when the platform starts automatically closing your losing trades to protect you from going into the negative. Since your account is fitted with negative balance protection, you can never lose more than you have put it, but that’s not much consolation if you still lose. So, what are your options? At this moment, the platform will start freeing up margin from your biggest losing trades to try and bring your Margin Level over 30%. If it can’t, your portfolio will be liquidated. Luckily though, you always have the option to top-up your account and prevent either of these events from ever occurring.
Risk Assessment Tip:
The best way to prevent a Stop Out from ever occurring is having a strong understanding of your own exposure on the market. If you don’t overexpose your account by opening more trades than your strategy dictates, you should be within a healthy margin level. Then, even if open positions go on a loss, you have a cash buffer and the time to decide if you want to top-up. Often a Stop Out could have been easily prevented long before it occurred, so keep an eye on your margin level to stay safe.
5. Types of fees
Swap
On the topic of money, let’s look at the two crucial types of fees you might have to pay depending on what type of trader you are. As you know, the only cost of trading is incurring a tiny loss every time you open a position—a few pips you can simply wait to reverse for you to be profitable. In CFD trading, since you open contracts for the difference in price of assets, and you do not own the underlying asset, each contract needs to be renewed daily. In other words, if you hold any position open overnight, you will be charged with a swap. A swap is the overnight financing fee, which is determined by the size of your trade. If you do not wish to be charged a swap, simply close your position on the same day you opened it.
Rollover
If you have ever traded with commodities, you might be familiar with this one. It’s called the rollover. In futures trading, you do not trade with crude oil or gold directly but rather with contracts for their future price. Those contracts expire every month and as such need to be rolled over to the next one if the trader wants to keep it open. If they expire, the trader then agrees to pay the money in exchange for the asset. In CFDs you do not exchange ownership of anything, but the concept remains the same. That’s why for some assets, there are expiration dates. If you decide to hold onto that position even after the expiry period, you will be charged a rollover.
6. Conclusion
Today we went on a language tour around your account, and we managed to examine the important words you will run into on your trading journey. Starting with the status bar elements, we learned how our money sits in our account and how it works for us actively, as well as how to keep track of it at a glance. Then, we learned what the words in the trading terminal mean, so we know how to open a position on the market. Next, we went over the events that can occur if we are not too careful, and of course – the fees you can expect depending on what and how you trade. Now you are ready to conquer the markets!
Key Takeaway Box:
- Keep your margin level above 100% to stay safe.
- Depositing funds is the safest way to avoid a Stop Out.
- If you don’t want to pay swap, close your position within the same day you opened it.