eToro – Forex Trading Forum

[Forex101]

You've probably heard the terms "pips" and "lots" a few times during your forex experience, here is a small explanation about them.
What is a "pip"?
A pip is the last decimal place of the quotation. If the EUR/USD moves one pip that means that it shifted from 1.5395 to 1.5396. Notice that most currencies have 4 decimal places, some currencies like the USD/JPY have only 2 decimal places (the rate would be 107.89).
What is a lot?
Forex is traded in lots. In eToro the standard lot size is what Forex traders call "mini-lots" which is worth $10,000. As I explained earlier, currency movements are measured in pips. Since pips are tiny movements (.01 or .0001) ,you need to trade large amounts of a particular currency in order to see any significant profit or loss.
How do I calculate profit and loss?
Let’s say we buy US dollars and Sell Canadian Dollar.
The rate is 1.0460 / 1.0462 We are buying US so the price is 1.0460, the rate at which traders are prepared to sell.
So you buy 1 lot of $10,000 at 1.0460
A few hours later, the price moves to 1.0480 and you decide to close your trade.
The new quote for USD/CAD is 1.0480/ 1.0482 Since you're closing your trade and you first bought to enter the trade, you now sell in and close the trade so you must take the 1.0482 price. The price the market is willing to buy at.
The difference between 1.0482 and 1.0460 is 0.0022 or 22 pips.
When you buy a currency you will use the offer price and when you sell you will use the bid price.
So when you buy a currency, you pay the spread as you enter the trade but not as you exit. And when you sell a currency you don't pay the spread when you enter but only when you exit.
What is Leverage?
You are probably wondering you can deposit $50 and trade like you get $10,000 from eToro to buy currencies.Sounds too good to be true? This is where leverage comes into play. In eToro the leverage scales from X10 to X400.


In X400 the minimal position is $25 (25x400=10,000) In X200 the minimal position is $50 (50x200=10,000) In X100 the minimal position is $100 (100x100=10,000)

eToro also has X50, X25 and X10 leverages with $200,$400 and $1000 minimum positions, you get the idea.

Have fun trading!

[annet1983]

when i started in forex those were the most difficult terms to understand for me, thanku for posting about it iam sure many people will find this information very helpful.

[xmenlawn]

Your explaination is fantastic, however i have one question concerning leverage which you mentioned.

When putting in $25 into a x 400 you get 10,000, assuming that you are winning you will gain extra from your 25 initial dollar, but what happened if you lose it instead, would that make you lose 25 X 400 of your money and also going into debt?

^_^

Anyone can answer this would be a great of help.

Kind regards,

Chan

[nomsintegrated]

if you choose the x400 risk/reward rate, the rate needs to move only 25 pips against u to wipe out your investment. If u chose x200, it will need to move 50 pips to wipe out ur investment etc But u wont go into debt bcos etoro has an "auto close trade" feature when ur investment has been wiped out, to avoid you going into debt.

[nomsintegrated]

if you choose the x400 risk/reward rate, the rate needs to move only 25 pips against u to wipe out your investment. If u chose x200, it will need to move 50 pips to wipe out ur investment etc But u wont go into debt bcos etoro has an "auto close trade" feature when ur investment has been wiped out, to avoid you going into debt.