You open a forex chart and see terms like pips, lots, spread, and leverage thrown around. Everyone assumes you know what they mean. Here’s the truth: most beginners don’t — and that’s okay. This glossary explains each term in plain English with real numbers you can actually use.
Trading involves risk. CFDs are complex instruments with high risk of losing money rapidly due to leverage. 70-90% of retail investor accounts lose money when trading CFDs. This glossary is for educational purposes only.
How to Use This Glossary
Each term includes a plain-English definition, a real trading example, and a link to a detailed guide. Terms are ordered from foundational concepts (pips, lots) to more advanced (swap, rollover).
Essential Forex Terms
Pip
A pip (percentage in point) is the smallest price move in most forex pairs — usually the 4th decimal place: 0.0001. For pairs involving JPY, a pip is the 2nd decimal: 0.01. Pips measure how much the price moved and how much profit or loss you made. One pip on a standard lot ($100,000) equals $10 (learn more about pips →).
Example: EUR/USD moves from 1.0850 to 1.0870 — that’s 20 pips. On a standard lot, 20 pips × $10 = $200 profit. On a mini lot (10,000 units), 20 pips × $1 = $20.
Pip vs Point: A point (or tick) is the smallest possible price movement — typically 1/10 of a pip. Most trading platforms show 5 decimal places for forex pairs, where the 5th decimal is a point. “20 pips” and “200 points” mean the same thing.
Lot
A lot is a standardized trade size. Standard lot = 100,000 units ($10/pip). Mini lot = 10,000 units ($1/pip). Micro lot = 1,000 units ($0.10/pip). Nano lot = 100 units ($0.01/pip). Beginners should start with micro lots — the smallest size, lowest risk (see how lot size works with leverage →).
Example: You have a $500 account and want to trade EUR/USD. A standard lot is way too big (you’d control $100,000 with 200:1 leverage). A micro lot ($1,000 controlled) is 2x your account — much more reasonable.
Spread
The difference between the bid (sell) price and the ask (buy) price. This is the broker’s fee for executing your trade — you pay it every time you open a position. Major pairs like EUR/USD have the tightest spreads (0.1-1 pip). Exotic pairs can have spreads of 10-50 pips (compare low-spread brokers →).
Example: EUR/USD bid is 1.0850 and ask is 1.0852. The 2-pip spread means you’re immediately 2 pips down when you buy. Price needs to move 2 pips in your favor just to break even.
Leverage
Leverage is borrowed capital that lets you control a larger position than your account balance would normally allow. 1:100 leverage means every $1 in your account controls $100 in the market. It amplifies both profits AND losses. A 1% price move with 1:500 leverage = 500% return or 100% loss of your account (learn how leverage works →).
Example: $500 account with 1:100 leverage lets you control $50,000. A 1% favorable move = $500 profit (100% return). A 1% unfavorable move = $500 loss (account wiped). Leverage is a double-edged sword.
Margin
Margin is the amount of money your broker requires as a “good faith deposit” to open a leveraged position. It’s not a fee — it’s collateral. Required margin = position size ÷ leverage. If your account falls below the maintenance margin requirement, you get a margin call — you must deposit more or your position gets closed (learn about margin requirements →).
Example: You want to open a $50,000 position with 1:100 leverage. Required margin = $50,000 ÷ 100 = $500. That $500 is locked while the trade is open. If your account balance drops below a certain level, you get a margin call.
Bid / Ask
The bid is the price at which you sell. The ask is the price at which you buy. The difference between them is the spread. If EUR/USD shows 1.0850 / 1.0852: you can sell at 1.0850 (bid) or buy at 1.0852 (ask). You always buy high and sell low in terms of bid/ask — that’s how the spread works against you (binary options vs forex: key differences →).
Long / Short
Going long means buying with the expectation that price will rise. Going short means selling with the expectation that price will fall. In forex, you’re always long one currency and short another (every trade is a pair). When you buy EUR/USD, you’re long EUR and short USD simultaneously.
Swap (Rollover)
Swap is the interest you earn or pay for holding a position overnight. Every forex position held past 5 PM ET (New York close) is “rolled over” to the next settlement date. If the interest rate of the currency you bought is higher than the one you sold, you earn positive swap. If it’s lower, you pay negative swap. Swap rates matter for long-term traders but are negligible for day traders and scalpers.
Slippage
The difference between the price you expected and the price your order actually executes at. Common during high volatility or news events. If you place a market order to buy EUR/USD at 1.0850, but it executes at 1.0855 due to fast movement — that’s 5 pips of slippage. ECN brokers typically have less slippage than market makers (compare execution speed across brokers →).
Forex Terms Cheat Sheet
Common Confusions
Leverage vs Margin — Leverage is the ratio (1:100). Margin is the deposit required. 1:100 leverage on a $50,000 position = $500 margin. They’re two sides of the same coin.
Pip vs Point — A pip is 0.0001. A point is 0.00001 (1/10 of a pip). Many beginners confuse them. When someone says “20 pips,” they mean 20 × 0.0001, not 20 × 0.00001.
Next Steps
Now that you understand forex terms, here’s what to learn next:
What Is Leverage in Forex? → — A complete guide to leverage and margin.
What Is a Pip? → — Master pip calculations with real examples.
Compare Forex Brokers → — See which broker offers the best spreads and leverage.
CFDs are complex instruments with high risk of losing money rapidly due to leverage. 70-90% of retail investor accounts lose money when trading CFDs. This glossary is for educational purposes only. Past performance does not guarantee future results.
Was this glossary helpful?