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To improve the chances of success when trading CFDs, you should understand the product in its entirety. This ensures that you can trade hassle-free and have the ability to make the best possible decision. On this page you will find a list and explanation of key terms. Examples are used to explain these terms in greater detail.

Underlying Asset:

The underlying asset is the object of agreement for the CFD. You want to trade based on the price movements of the EUR/USD? In this case you would choose the underlying asset that corresponds with the currency pair EUR/USD. Underlying assets are divided into four different categories: currency pairs, indices, stocks and commodities.

Gap:

Gap is also known as a price gap. In a liquid market, there is continuous pricing, i.e. each price level is assessed in the market.

Example:
Apple shares rise from $100.00 to $100.10 in ten steps, for each cent a price is assessed. A Gap arises when the price jumps directly from $100.00 to $100.10 and any price between has been skipped. Such gaps can result in your position having better or worse entry or exit prices.

Bid/Ask price and the Spread:

Each underlying asset is specified with two prices, the so-called bid and ask price. The bid price is always the price at which you sell an underlying asset and the ask price is always the price at which you buy an underlying asset. The difference between these two prices is referred to as the Spread. Further information can be found HERE.

Holding period overnight or Rollover:

You are trading in large volumes on the market, which means you need to borrow large amounts of money at long positions and make money available for short positions. For long positions held overnight, you are usually required to pay interest (Rollover), with short positions this interest is usually credited to your account. The exact payment will depend on the interbank interest rates. Further information can be found HERE.

Trading hours:

The MetaTrader platform is available for trading currency pairs from Monday 00:00:51 (GMT+1) until Friday 23:59:59 (GMT+1). These times are subject to Daylight Savings Time, which begins on the last Sunday of March and ends on the last Sunday in October. Individual underlying assets are subject to different trading hours. Before trading, please inform yourself about these and any associated risks. Further information can be found HERE.

Leverage:

Leverage describes the situation in which through the use of borrowed capital, small market movements can lead to major shifts in the final outcome. Leverage indicates in what proportion the capital invested is borrowed capital. 1:100 means that when you have invested a sum of €101, €100 of this is borrowed and one Euro comes from your capital. Through this effect, a 1% move causes the total amount to rise by €1.01. To achieve this amount without borrowing, it would require movement of 101%. When trading CFDs, the Leverage refers to the ratio between the required margin and the amount of capital that is being moved on the market. The following example should help you to understand.

Example
You want to trade in EUR/USD, which is currently trading at $1.08755 with a standard contract, which corresponds to 100,000 units of the underlying asset, which in this case represents a total market volume of $108,755. Your margin requirement, the amount you need for opening the CFD position is determined by the leverage. The following example will illustrate the relationship between leverage and margin when the total volume remains constant.

Leverage Volume Margin
100 $108,755 $1,087.55
200 $108,755 $543.78
500 $108,755 $217.51

As you can see, high leverage decreases the required margin. Based on the provisions of a standard contract, the moving volume is always the same. A leverage of 500 means that you only need $217.51 as collateral, but are actually moving 500 times that much on the market.

Account balance:

You should always have sufficient capital in your trading account as failure to do so may result in unwanted closures of your positions.

Example:
You have $2,500 in your account and want to trade two standard contracts on rising EUR/USD prices. At a price of $1.10, this corresponds to a margin of $2,200, which is within your capabilities. The EUR/USD continues to fall and reaches a price of $1,08970, which for you means a loss of $2,060. At this point your position will be closed automatically since your account balance reached the 20% threshold of the required margin. ($2,500 – $2,060 = $440; $440 = 20% * $2,200) If the EUR/USD should rise again, you can no longer profit from this price increase. The exact conditions with regard to margin call and position closing automatically can be read HERE.

Contract size or Lot:

The contract size, also known as Lot, always describes the trading volume of the underlying asset and therefore determines what value is attributed to one pip per contract size.

Example:
Currency pairs are usually traded with 100,000 units per standard contract. The value of a pip is obtained by multiplying the pip by the number of units.
EUR/USD → Pip * Unit = $0.0001 * 100,000 = $10
GOLD → Pip * Unit = $1 * 100 ounces = $100

Liquidity:

Liquidity describes the actual availability of the underlying asset. High liquidity leads to steady pricing, which means you should be able to receive your requested price. Low liquidity may lead to price spikes (see Slippage and Gap) whereby the charged price may differ from the price you request.

Margin:

The term “Margin” corresponds to the necessary funds freely available in a trading account for the purpose of opening a new position. This amount will be set aside from your trading account to serve the purpose of a security in the event of price fluctuation.

The Margin will be made available again following the closing of a position. Any generated losses are deducted directly from this. Losses that can not be covered by the margin will be deducted from your trading account. For the exact margin conditions, click HERE.

Pip:

A Pip is the unit in the trade in which the price change of the underlying asset is specified. The size of a Pip depends on the traded underlying asset and its specified price. In most cases, this very simple rule applies: The smallest invoicing size of the underlying price multiplied by the factor 10 corresponds to a pip.

Example:
EUR/USD is always displayed to the fifth decimal place – 0.00001 – multiplied by 10 → Pip = 0.0001
USD/JPY is always displayed to the third decimal place – 0.001 – multiplied by 10 → Pip = 0.01
DAX Index is always displayed to the first decimal place – 0.1 – multiplied by 10 → Pip = 1

Slippage:

In times of volatile markets, it can happen that your position can not be closed at the pre-defined Stop-Loss or Take-Profit level. The difference between the set Stop-Loss or Take-Profit level and the actually executed price is called Slippage.

Example:
The EUR/USD is trading at $1.10248/$1.10256 and you have opened a position on rising prices at a price of $1.10256 with a standard contract. A Take-Profit order should secure your profits at a price of $1.10340/$1.10348. Market news leads to rapid price fluctuations and the price increases from $1.10338/$1.10346 directly to $1.10362/$1.10370. The desired Take-Profit price of $1.10340 can not be received as the first available price was $1.10362. The difference of $ 0.00022 is called slippage. Your profit with a standard contract has increased by $22. These price fluctuations may cause both your profits and losses to be higher than expected.

Stop and Limit:

Stop and Limit refer to the method of execution of your placed orders. These two terms have nothing in common with the similar sounding expressions Stop-Loss and Take-Profit. A STOP Order states that you expect the existing trend of the price to continue after it reaches your order price. A LIMIT Order states that when your order price is achieved there will be a reversal in the current trend. Further information can be found HERE.

Stop-Loss and Take-Profit

These types of order execution will help you automatically close positions once they reach defined levels. The Stop-Loss function allows you to control your losses and the Take-Profit function allows you to protect your profits. Further information can be found HERE.

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