 Forex Trading Concepts - Market Price, Spreads, CFD Profit, Margin | Inveslo    Point in price, or pip for short, is the smallest unit of a price change that any given exchange rate can make.

Most currency pairs are quoted to five decimal places which the fourth decimal place refers to as a pip.

The pairs include Japanese Yen are the exception. Their prices are measured to three decimal places, and the pip corresponds to the second decimal digit.

For CFDs, the minimum price movement is called a tick. Tick size varies for different CFDs depending on the type of CFD and its provider found in the contract specification.

• CFDs on gold, US oil, and UK Brent are quoted to two decimal places and the second decimal digit known as a tick.
• CFDs on silver, natural gas, and Litecoin are priced to three decimal places, and the third decimal place refers to as a tick.
• CFDs on indices and bitcoin are measured to one decimal place that is the minimum unit of price movement.

### EURUSD

1.19510 1.19500 0.00010
1 pip

The difference between the ask price and the bid price is known as spread representing the cost of trading. For instance, if EURUSD is trading with an ask price of 1.19510 and a bid price of 1.19500, the spread is 0.0001, equal to one pip.

Now that you understand pip and lot, it's time to calculate profits and losses in quote currency, which simply is the amounts traded multiply by the change in pips.

For instance, if you open a buy position of 1 lot EURUSD at 1.18650 and close your position at 1.18775, you will profit 0.00125 or 12.5 pips that in this case, it is equal to €100,000 * 0.00125 = \$125

in the base currency
Change in pips Profit(Loss)
in the quote currency
Example:
100,000
0.00125 \$125

### In CFDs, the profit (loss) is calculated by multiplying the units traded by the change in dollar per unit.

For example, if you open a sell position of 1 lot gold at 1795.00 and close it at 1791.50, you will earn \$3.5 per ounce. As one lot of gold is equal to 100 ounces, your profit here will be 100 * 3.5 = \$350

Change in USD
In USD Profit (Loss)
In USD
Example:
100
\$3.50 \$350

#### Leverage

Leverage is a loan provided by the broker to the traders that increases their trading capital to control bigger positions than their initial balance. If you deposit €5000 to your trading account with the leverage of 1:100, your trading capital will increase by 100 times to €500,000.

In this case, if you buy five lot EURUSD and profit 100 pips, you will earn €500,000 * 0.0100 = \$5000, which means you will almost double your capital. If you lose 50 pips on your trade, you will lose €500,000 * 0.0050 = \$2500, which costs you to lose about half of your money.

Balance
Leverage Example:
€5,000
100 €500,000

#### Margin

Since the trader uses leverage, the broker requires the amount of money as collateral called margin to ensure that all potential losses will be covered. Dividing one by leverage multiplying by 100 gives the margin percentage. The required margin is the amount of trade multiply by margin percentage.

For example, for a trading account of \$500 and the leverage of 1:100, the required margin for an open position is 1%. For opening a buy position of 2 lots EURUSD at 1.1950, the margin required to keep this position open is calculated like this: €200,000 * 1.1950 * 1% = \$2390

1 Leverage Margin percentage
1 100 1%
In quote currency
Margin percentage Required margin
In base currency
Example:
\$239,000
1% \$2,390

The margin call level is a fixed percentage of the margin level, which alerts you to deposit more money to meet the required margin or, alternatively, close some of the least profitable positions to free up margin. For example, If your equity falls below 50% of your used margin because of the floating losses of your open positions, the broker will notify you on your devices to free up some margin. If the margin level keeps falling, the stop out will be triggered at a preset margin level of 20%.

Stop out is the percentage of margin level at which the least profitable positions will get closed automatically by the broker to back your margin level to 100% and protect you from losing more money than your deposit.

Margin call and stop out are determined by the broker and vary in different trading accounts.