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Forex Q&A

GMI’s Forex Questions and Answers (Q&A) section is a comprehensive review of common (and not-so-common) terms and phrases used in the global trading industry.

 

What is a pip? (And why is it called that?)

 

What is negative balance protection? (And why is it important for traders who use leverage?)

 

How can I make use of social trading?

 

You’ll find all that information and more in GMI’s Forex Q&A.

 

If you don’t see the definition or explanation for a term you’re interested in, or would like to offer our readers a better result than what we’ve written (no pride-of-authorship here!), then just let us know and we’ll follow up ASAP for you!

 

The definitions and explanations below refer to what these terms mean in the context of Forex and CFD trading. Note that they may have different meanings in other areas of finance, or in non-financial contexts.

  • What is a Forex Broker?
  • The term Forex Broker refers to a company which offers its clients trading in off-market financial instruments such as foreign exchange pairs (or “Forex”) as well as CFDs on on-market instruments. Some Forex Brokers (also called CFD brokers) are licensed and regulated by recognized financial regulators (such as the FCA in the UK, CySEC in Cyprus, and ASIC in Australia), while many others operate offshore as unlicensed brokers.
  • What is a Multi-Asset Broker?
  • A Multi-Asset Broker refers to an online broker which offers a variety of financial instruments for trading. Many Multi-Asset Brokers began life offering one financial instrument, such as FX pairs trading, and then branched out to offer more trading options to their clients. Typical Multi-Asset Brokers offer FX pairs, plus CFDs on a variety of instruments such as commodities, bonds, equity indices, individual stocks, and ETFs. Some also now offer cryptocurrency pair trading.
  • What is an Offshore Broker?
  • An Offshore Broker refers to a Forex Broker which is licensed by an “offshore” area (such as Mauritius, St Vincent and The Grenadines, Seychelles, or Vanuatu) or operates from a jurisdiction that does not require brokers to hold a license to operate. Many Forex Brokers from regulated jurisdictions (e.g. the EU and Australia) also operate Offshore Broker subsidiaries for clients from certain regions.
  • What do Pips mean for traders?
  • Pips are short for either “price interest point” or “percentage in point”. Whatever their acronym origin, in practice Pips refer to the smallest unit of measure in the price of a traded currency pair or CFD. Typically, a Pip refers to 1 / 10,000 of a point (i.e. the fourth decimal place) in the base price of a currency pair. For example, if the price of the GBPUSD pair rises from 1.2975 to 1.2976, it is said to have risen by one Pip. As described, there are typically ten Pips in a Basis Point.
  • What is Spread in trading?
  • Spread refers to the difference between the buy price and sell price of a financial instrument being offered for trade by a broker. In the Forex world, Spread is normally quoted in Pips. For example, if a Forex broker is showing EURUSD at a Sell price of 1.2974 and a buy Price of 1.2976, then the Spread for EURUSD at that broker at that moment is 2 Pips.
  • What is a Trading Platform?
  • Software systems used by traders to do everything from manage their accounts and positions at brokers, to access charts and analysis, to effect trades, are known as Trading Platforms. Trading Platforms can be downloaded to a trader’s computer or mobile device, or accessed online in the cloud via the broker. The most common Trading Platforms offered by Forex brokers and used by Forex traders include MetaQuotes’ MetaTrader 4 (MT4) and its successor MT5, and Spotware’s cTrader.
  • What is Social Trading?
  • Social Trading refers to the increasingly popular phenomenon of traders engaging with other traders in the process of making trading decisions. Social Trading ranges from traders using modified social platforms to discuss their trades and strategies, to actual copying trades or portfolios of other traders. In the latter scenario, brokers often allow for expert traders (often referred to as “Leaders”) to allow novice traders (called “Followers”) to copy their trading strategies, and earn a percentage of the profits of those copying traders. Given the recent popularity of Social Trading and its propensity to help brokers grow trading volumes among the client base, some forex brokers have gone as far as rebranding as social trading brokers, or social trading platforms.
  • What are Trading Signals?
  • Trading Signals are sell or buy (or hold) indications for traders generated on an automated or manual basis based on some sort of statistical analysis of data. Trading Signal providers often sell their services to traders on a subscription basis. An example of Trading Signals is sentiment trading, whereby analysis of positive or negative sentiment on a topic (e.g. consumer confidence) on a social media platform (e.g. Twitter) is converted into actionable trade signals for traders.
  • What is Forex Regulation?
  • Forex regulation refers to the set of rules and regulations governing brokers that offer financial trading services to both retail and institutional traders. Forex regulation typically covers issues such as maximum leverage, negative balance protection, know-your-client procedures, segregation of client funds, client inducements such as deposit bonuses, and advertising. Most Forex Regulations are set separately by each country’s national financial regulator (such as the FCA in the UK, ASIC in Australia and CySEC in Cyprus), and can vary greatly from country to country. In the EU, there has been a recent push led by pan-EU regulator ESMA to harmonize financial regulatory rules across all EU countries.
  • What is an Introducing Broker?
  • An Introducing Broker (or “IB”) is a person or entity which makes money by introducing clients to a Forex broker. IBs are typically compensated on a variable basis, based on either the initial acquisition of a new client by a broker, to the amount of money deposited by introduced clients, to a share of the trading commissions generated by those clients over time (usually in the form of Spread revenue). Many IBs operate websites which attract traders by offering free information such as trading education, daily market research, or trading signals. The IBs then monetize that traffic by running ads for brokers, making money as clients click those ads and open account (and trade) with those brokers.
  • What are Binary Options?
  • Binary Options represent a win-or-lose-all bet as to whether a certain measurable instrument – such as a stock index, or a currency pair price – will move either up or down within a certain defined time frame. Following a wave of aggressive marketing of Binary Options by (mainly) unlicensed brokers to novice traders in the mid 2010s, and a parallel number of scams whereby traders were unable to withdraw their money from a number of these brokers, several of countries and regions outlawed Binary Options altogether, including the EU and Israel. Australia’s financial regulator ASIC is currently considering such a ban.
  • What is an A-book Broker?
  • An A-book Broker (also often called an ECN broker) refers to a Forex or CFD Broker which does not take the opposite side of its clients’ trades. A-book Brokers typically route client trades to third party financial institutions or liquidity providers. A-book Brokers earn money by charging a larger spread to its (usually retail) clients, than it receives from its outside liquidity providers. Some A-book Brokers match off simultaneous opposing aggregated client orders before sending the “unmatched” client orders out to liquidity providers.
  • What is a Liquidity Provider?
  • A Liquidity Provider is a bank or non-bank financial institution which offers buy-and-sell rates on a variety of forex pairs and CFDs to Forex Brokers and (sometimes) to institutional traders generating large amounts of trading volume. They thereby provide trading liquidity to the broker and the broker’s trading clients.
  • What is a B-book Broker?
  • A B-book Broker refers to a Forex or CFD broker which takes the opposite side of client trades. Most B-book Brokers look to match opposing client orders to minimize risk, while hedging one-sided trading in a certain instrument by offsetting with outside liquidity providers.
  • What is Margin?
  • Margin is an opposite expression of Leverage. For example, 100x leverage equates to a requirement for Margin of 1%. Margin is often referred to by Forex brokers as the amount of capital required to be maintained by a client relative to the size of that client’s open trades.
  • What is Leverage?
  • Leverage refers to the amount of trading size a broker allows its clients, relative to each client account’s deposited equity base. For example, a client who deposited $1,000 at a broker offering 100x (or 100:1) leverage will be allowed to open a $100,000 trading position. Leverage levels vary based on instrument type, and are often limited by regulators.
  • What are the Forex Majors?
  • Forex Majors refer to the seven pairs of most-liquid and most-traded foreign currencies. The Forex Majors each consist of the US Dollar (USD) versus one of seven other “major” currencies – the Euro, Japanese Yen, British Pound, Australian Dollar, Swiss Franc, New Zealand Dollar, and Canadian Dollar. Forex brokers often offer (and regulators allow) higher levels of Leverage in trading the Forex Majors. The Forex Majors are typically quoted as: EURUSD, USDJPY, GBPUSD, AUDUSD, USDCHF, NZDUSD and USDCAD.
  • What is Slippage?
  • Slippage refers to the change in offered buy or sell rates seen by a client, between the time a client orders a trade and the time when that trade is executed. Slippage can either benefit or harm a client (relative to the price that client thought that he/she was getting), depending on the movement in rates in the time (sometimes measured in microseconds) between when an order is made and is actually executed.
  • What is Scalping?
  • Scalping refers to the practice of traders attempting to lock in risk-free profits by taking opposite (i.e. hedging) positions at different brokers, by taking advantage of a real-time difference in rates being offered by different brokers. Some Scalpers employ advanced low-latency computer systems scouring for any difference in buy and sell rates between a large number of Forex brokers.
  • What are CFDs?
  • The term CFD is an acronym for Contract for Difference. A CFD is a synthetic financial instrument, quoted by Forex or CFD Brokers, which track the movement of (usually) actual listed financial instruments. CFDs allow traders to trade on the movement of an actual security, such as the price of gold or shares of leading publicly traded companies, without actually owning that security. A CFD quoted by a Forex/CFD broker will usually be quoted at the same price at which the security is trading in the listed markets.
  • What is Bid and Ask?
  • Bid and Ask refer to the two prices that a broker offers traders to buy (Ask price) or sell (Bid price) a currency pair or other financial security. The difference between broker’s Bid and Ask price is called the Spread, measured in Pips.
  • What is a Currency Pair?
  • As Forex trading involves betting on the movement in one currency relative to the other, a Currency Pair such as the EURUSD is the price of one currency (e.g. the Euro) expressed in the price of another (e.g. the US Dollar). The Forex Majors are the seven most-liquid and most-traded Currency Pairs.
  • What is Cable in Forex trading?
  • Cable is business slang for the GBPUSD currency pair, that is the price of British Pounds expressed in US Dollars.
  • What is a Basis Point?
  • A basis point typically refers to one-tenth of one percent (i.e. 0.1%) of the price of a financial instrument. There are ten pips in a basis point.
  • What is Negative Balance Protection?
  • Negative Balance Protection is a condition offered by certain Forex brokers to limit a client’s losses to the amount of money deposited by that client. Thus, if a client is trading with leverage and that client’s account balance drops below zero due to a large market move against the client’s position, the client’s account equity balance is automatically reset to zero. Some national regulators require Negative Balance Protection to be offered to retail traders.
  • What is a Round Trip in Forex trading?
  • A Round Trip refers to a Forex trade which is opened and then subsequently closed – hence, the term Round Trip. When reporting trading volumes, some brokers report Round Trip volumes, but most report one-way trading volumes.
  • What is a Short Sale, or Going Short?
  • A Short Sale (or “Going Short”) refers to the act of borrowing a financial security (usually from a broker) and selling it. Thus, a trader who does a Short Sale is effectively betting that the price of that financial security will go down. The trader will later need to “cover the short” by buying the financial security (hopefully at a lower price), and then returning the borrowed financial security to the broker.
  • What is Cryptocurrency?
  • Cryptocurrency, also referred to as Digital Currency or Virtual Currency, refers to the myriad types of digital assets used as an anonymous medium of exchange on the Internet outside of the global banking system. Cryptocurrencies – the most popular and well-known type of which is Bitcoin – are typically not backed by any hard assets or government, having value only insofar as others are willing to accept them or exchange them for “real” currencies. Cryptocurrencies can be exchanged for each other, or for “real” government issued currencies (such as the US Dollar), on a variety of cryptocurrency exchanges. Many Forex brokers offer CFDs on leading cryptocurrencies.
  • What is a Deposit Bonus?
  • A Deposit Bonus is a marketing and client retention tactic used by Forex brokers to encourage new clients to open an account, deposit money and trade. Or, similarly, to incentivize existing clients to up the level of equity in their accounts. Typically, the broker agrees to deposit a certain fixed amount of money, or a percentage of the new money deposited by the client, as a free bonus. The Deposit Bonus usually comes with the condition that the client trades a certain nominal amount over a certain period of time, in order for the Deposit Bonus to be kept by the client. A number of regulators have outlawed the use of Deposit Bonuses, and they are now used mainly by offshore brokers.
  • What is EU License Passporting?
  • License passorting is a regime established in the European Union (EU), allowing a financial services company in one EU country to be licensed/regulated by that country’s national regulator, and then offer its services in all other EU countries without the need to be separately licensed in each country. The license passport will (for the time being, at least) be continued between EU countries and the UK following Brexit.
  • What is a White Label?
  • A White Label in forex terms refers to a turnkey brokerage system provided by an existing active broker, to other entities which want to wrap their own name and brand around that system and offer forex and CFD trading to their own clients. Brokers often provide this package free of charge (or for a minimal fee to cover setup costs), if they believe that the “white label” firm is serious about putting resources into marketing, and generating significant trading volume from their clients. The broker is then paid over time, sharing spread revenue with the white label firm as clients of the white label firm trade.
  • What is a Prime Broker?
  • A Prime Broker is a firm which offers Forex brokers connectivity to a variety of (usually) Tier 1 liquidity providers. As many Retail Forex brokers are simply not large enough, and do not have enough capital, to have an account with a number of liquidity providers, the Prime Broker fills that access gap. Prime Brokers often provide other related services to Forex brokers such as risk management and alerts based on net broker positions.
  • What are Negative Interest Rates?
  • Negative Interest Rates occur when a bank charges its depositors interest on their cash deposits, instead of (traditionally) paying out some amount of interest on cash deposits. Negative interest rates can occur when demand for loans in a particular currency is very low. That typically happens during times of low (or zero) inflation coupled with sustained low or negative economic growth.
  • What is a Forex Scam?
  • Forex scams refer to a variety of fraudulent schemes used to effectively steal money from retail traders. The most common forex scam is one where brokers or other supposed fiduciaries promise outlandish or guaranteed returns from trading foreign exchange and off-market CFDs. Other forex scams proffer “systems” or forex trading software guaranteeing high returns. The scammers typically make money either from the sale of high-priced “trading courses”, trading software, or from outright taking of client money with no intention of investing it, or ever returning it. To avoid forex scams, retail investors should only engage with properly licensed brokers and money managers.
  • What are Turbos?
  • Turbos – also known as speeders or sprinters – are leveraged structured products, popular mainly with retail traders in the Netherlands. Turbos are exchanged traded leveraged instruments which provide an indirect (long or short) exposure to an underlying asset (such as a stock index, or company stock), with the potential loss limited to the amount paid for them.
  • What is Copy Trading?
  • Copy Tradiincreang is an singly popular service being offered by FX and CFD brokers, allowing (mainly) beginner and novice traders to copy the trades of more experienced traders. Thus the inexperienced traders get the benefit of the moves made by more seasoned traders, and the experienced traders can earn extra money via (usually) a percentage of the profits of those who copy them. The FX broker which facilitates the copy trading service makes money via the increased spread revenue generated by higher trading volumes. Copy trading is often offered via third party or white label platforms which integrate different copy trading related tools which can include chat, portfolio balancing and trade sizing.
  • What is Spread Betting?
  • Spread Betting is a modified version of CFD trading popular mainly in the UK. With Spread Betting, the trader is making a bet based on the direction and size of a financial instrument’s movement. Spread Betting allows the user to bet a certain amount per “point” of spread movement of a financial instrument. For example, if the last trade of an instrument (e.g. a forex pair, stock, commodity, index…) was 100, and the “spread” being offered by the broker was 99-101, the trader could decide to bet a fixed amount (say £10) per “point” of spread. If the instrument moved to 110 (and the bet was that the instrument would indeed move up) with the spread similarly moving to 109-111, then the profit on the trade would be £80: £10 * (109-101).
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