KNOWLEDGE BASE

• The spread is the difference between the buy (ask) and the sell (bid) price of an instrument.
• The spread is one of the chief costs of a trade
• The tighter (smaller) the spread, the lower the cost of the trade
• We offer both ‘fixed’ spreads and ‘floating’ spreads, so you can decide which account best suits your trading style and strategy

The spread on financial markets is the difference between the buy (ask) price of an instrument and the sell (bid) price of an instrument. When placing a trade on the market, the spread is also the main cost of the position. The tighter the spread, the lower the cost of trading. The wider the spread, the higher it costs. You can also view the spread as the minimum distance the market has to move in your favour before you could start earning a profit.

For example, let’s say our EURUSD market is quoted with a buy price of 1.0984 and a sell price of 1.0983, so the spread is calculated by subtracting 1.0983 from 1.0984 – giving a total spread of 0.0001 or 1 pip. Once you’ve placed a trade on the EURUSD market and the market moves at least 1 pip in your favour, that’s when your position can begin generating profits. This is also the reason that when you first place the trade, you’ll start off making a small loss.

• A currency pair is made of up two currencies traded in the forex market
• All currency pairs are quoted in terms of one currency versus another
• Each currency pair has a ‘base’, which is the first denoted currency, and a ‘counter’ which is the second denoted currency
• Each currency could strengthen (appreciate) or weaken (depreciate). As there are two currencies in each pair, there are essentially four variables you are speculating on when it comes to currency pairs
• There are major currency pairs and minor/exotic currency pairs

All forex pairs are quoted in terms of one currency versus another. Each currency pair has a base which is the first denoted currency, and a counter which is the second.

When you place a trade on a currency pair, you’re essentially buying one currency and selling another – but in a single transaction. So for example, going long or ‘buying’ EUR/USD means you’re buying the Euro and selling the US dollar. Going short means that you’re ‘selling’ the Euro and buying the US dollar.

Currency values rise (appreciate) and fall (depreciate) against each other due to a number of economic, geopolitical and technical factors and the forex market is the most traded in the world, with an average turnover in excess of $5 trillion a day. This makes it a highly volatile market and it’s available to trade on 24 hours a day, five days a week (Monday to Friday).

What are the major currency pairs?

Major currency pairs are the most traded currency pairs in the world and it is estimated that trading on those currencies represents over 80% of the whole foreign exchange market. Those currency pairs are: EURUSD, GBPUSD, USDCHF, AUDUSD, NZDUSD and USDCAD.

Out of all the majors, the EURUSD is the most liquid currency pair; meaning that it is the most traded currency pair in the world.

Contracts For Difference (CFDs) are specialized and popular Over The Counter (OTC) financial derivative products which enable you to trade on the price movement of financial assets, including Indices Futures, Commodity Futures, Shares, and Exchange Traded Funds, without actually owning the underlying Asset.The main benefit of trading CFDs is the flexibility to trade against price movements without actually buying or selling the physical financial assets. Noble Trading’s CFDs derive their price from the underlying asset. You can trade CFDs if you believe the price of a financial instrument is likely to go up in value (strengthen), and also if you think it is likely to go down (weaken). Your profit or loss in online CFD trading is determined by the difference between the price you buy at and the price at which you sell.

Leverage allows a client to trade without putting up the full amount. Instead a margin amount is required. For example, 50:1 leverage, also known as 2% margin requirement, means $2,000 of equity is required to purchase an order worth $100,000. 400:1 leverage means $250 is required to purchase an order worth $100,000. Leverage increases both upside and downside to risk as the account is now that much more sensitive to price movements.

A margin call is a protective measure that helps traders to manage their risk and prevent additional losses.

• A margin call, also known as a margin stop, is a protective measure that helps traders to manage their risk and prevent additional losses
• The limit level is calculated by dividing your equity by the required margin and multiplying by 100%
• Margin calls happen when there aren’t sufficient funds to cover the margin requirement
• At Noble Trading, a margin call occurs when your margin level falls below 30%
• Once a margin call occurs, your open position with the biggest loss will be automatically closed until your margin level returns back above 30% to protect your account from suffering further losses. This is how Noble Trading helps you to manage your risk.
• To avoid being closed out of your position by a margin call, you’ll need to ensure your margin level remains above 30% by depositing more funds

Limiting losses is one of the most important aspects of trading and many traders choose to use stop loss orders (hyperlink to stop loss) as a protective measure. On the other hand, some traders decide to manage their risk manually by monitoring their open transactions.

Your margin level is the deposit required to maintain each open trade on your account. To open and maintain your trade, you must have sufficient trading resource to cover the margin requirement at all time.

Free margin represents the amount of capital you have remaining to place new trades or cover any negative price moves in your open trades.

The margin stop is a protective measure, particularly for traders who do not use stop loss orders. When the margin level falls below 30%, your open position with the biggest loss will be automatically closed as an in-built safety mechanism.

Margin level in forex trading refers to the ratio of equity to margin. It is a measure of how much margin is available to open new positions or sustain existing ones. It is calculated by dividing the equity in the trading account by the margin required for open positions, and then multiplying by 100 to obtain a percentage.

The formula for margin level is:

Margin Level = (Equity / Margin) x 100

Equity represents the current value of the trading account, which includes both the initial capital and any profits or losses from open positions. Margin refers to the amount of money required to open and maintain positions in the market.

Margin level is an important concept in forex trading because it helps traders monitor the health of their trading accounts. A high margin level indicates that there is sufficient margin available to support open positions and potentially open new ones. On the other hand, a low margin level suggests that the account is at risk of a margin call, which could lead to the automatic closure of positions by the broker to prevent further losses.

Different brokers may have different margin level requirements, so it is important for traders to understand their broker’s specific rules and maintain a sufficient margin level to avoid margin calls and potential liquidation of positions.