1. Account Types
An account type refers to the different categories of trading accounts provided by brokers. Common types include Demo Accounts, Live Accounts, and Challenge Accounts.
Each account type may differ in terms of leverage, trading conditions, commissions, and specific operational rules.
1.1 Demo Account
A demo account is designed for practice trading using virtual funds instead of real money. There are generally two forms of demo accounts:
- Backtesting Accounts allow the replay of historical market data and placement of trades for skill refinement, depending on broker capabilities.
- Forward Testing Demo Accounts enable practice trading during live market hours using virtual capital.
These accounts help traders become familiar with the platform interface, test strategies, and practice order execution without the financial risk associated with real money.
1.2 Live Account
A live account involves real-money trading.
All profits and losses are actual, and positions are influenced by real market conditions, spreads, and commissions.
Performance in a live account provides an authentic reflection of trading outcomes under market dynamics.
1.3 Challenge Account
A challenge account is typically offered by proprietary trading firms (prop firms).
Participants must meet specific profit targets and adhere to defined risk management parameters within a given timeframe.
Successful completion of the challenge often grants access to a funded account, allowing the trader to operate with real capital provided by the firm.
1.4 Account Balance
An account balance represents the total funds available in a trading account.
It includes deposits and realised profits or losses from closed trades but excludes unrealised (floating) profits or losses from open positions.
Example:
If an account holder deposits USD 10,000 and later closes a trade with a USD 500 profit, the new account balance becomes USD 10,500.
2. Trading Terminology
2.1 Long and Short Positions
A long position refers to buying an asset with the expectation of a price increase. The profit is generated by purchasing at a lower price and selling at a higher one.
Example:
Buying gold at USD 1,900 and selling at USD 2,100 yields a profit of USD 200 per ounce.
A short position (short selling) refers to selling an asset with the expectation that its price will fall. Profit is achieved by selling at a higher price and repurchasing at a lower one.
Example:
Selling the GBP/USD currency pair at 1.1000 and repurchasing at 1.0900 produces a 100-pip profit. With a lot size of 10, the gain would total USD 1,000.
2.2 Lot Size
A lot size determines the volume or contract size of a trade.
| Type | Size |
| Standard Lot | 100,000 units of base currency |
| Mini Lot | 10,000 units |
| Micro Lot | 1,000 units |
Example:
One standard lot of GBP/USD represents 100,000 units of the base currency.
2.3 Order
An order is an instruction to buy or sell a financial instrument. Orders can be of various types, including market orders, limit orders, and stop orders.
Example:
A market order executes immediately at current prices, whereas a limit order triggers only when the market reaches a pre-specified price.
2.4 Take Profit (TP)
Take Profit (TP) is a pre-determined level where a trade automatically closes to secure profits once the market price reaches a set target.
Example:
A buy trade on gold at USD 1,900 with a TP set at USD 2,000 will close automatically when the price reaches USD 2,000, locking in profit.
2.5 Stop Loss (SL)
Stop Loss (SL) is a pre-set level where a trade automatically closes to limit potential losses.
Example:
A buy position on gold at USD 1,900 with an SL set at USD 1,800 limits the loss to USD 100 per ounce if the price declines.
2.6 Commissions and Fees
They may include spreads, direct commissions, and overnight financing (swap) charges. Fee structures vary according to account type and broker.
Example:
Some accounts charge minimal spreads plus a fixed commission per trade, while others integrate the cost within the spread itself.
2.7 Close Position
Closing a position refers to executing the opposite trade to exit an open position and realise the resulting profit or loss.
Example:
If a trader opens a long position (buy) in GBP/USD, executing an equivalent sell order will close the position.
3. Common Market and Instrument Terms
3.1 Market Price and Quotes
The market price (quote) displays the current bid (selling) and ask (buying) prices available.
Example:
If GBP/USD is quoted at 1.1000/1.1002, the bid price is 1.1000 and the ask price is 1.1002.
3.2 Spread
The spread represents the difference between the bid and ask prices, forming one of the primary trading costs.
Example:
For a quote of 1.1000 to 1.1002, the spread equals 2 pips.
3.3 Swap or Rollover
A swap (rollover) is the interest or fee charged or credited for holding a position overnight. It reflects the interest rate differential between two currencies or the cost of extending a position.
Example:
Buying GBP/USD may earn a positive swap if the GBP interest rate exceeds the USD rate; otherwise, a swap charge may apply.
4. Core Concepts
4.1 Pips and Pip Value
A pip (percentage in point) is the smallest standard unit of price movement in Forex or CFD trading, usually the fourth decimal place in currency pairs.
Example:
A movement in GBP/USD from 1.1000 to 1.1001 equals 1 pip.
4.2 Why is it important?
Understanding pip value is essential for effective risk management, position sizing, and accurate profit/loss estimation before trade execution.
5. Leverage and Margin
5.1 Leverage
Leverage enables traders to control larger market positions using smaller capital amounts, effectively borrowing funds from the broker.
While leverage magnifies potential profits when the market moves favourably, it also amplifies potential losses in adverse conditions.
Advantages:
- Increases profit potential.
- Provides access to larger trade volumes.
Risks:
- Small market movements can result in significant losses.
Example:
With an account balance of USD 1,000 and leverage of 1:100, a trader can control a USD 100,000 position. If losses occur, the broker liquidates the position, using the trader’s capital to cover the loss.
5.2 Margin
Margin represents the collateral or deposit required to open and maintain a leveraged trading position. It serves as a safety buffer against potential losses but is not a fee. Once a position is closed, the reserved margin is released back into the account balance.
If the margin level becomes too low, brokers may issue a Margin Call (request for additional funds) or trigger a Stop Out, which forcibly closes positions to prevent further loss.
