Basic Concepts of Trading
Before entering the financial markets, it is important to understand the core concepts behind how trading works. From leverage and margin to spreads and swaps, these are the foundations every trader should know before opening positions on MT4 or MT5.
1. Leverage
Leverage allows traders to control a larger trading position with a smaller amount of capital.
For example, if a broker offers 1:100 leverage, it means you only need 1% of the full position value as margin.
Leverage can increase potential profits, but it can also increase potential losses. Therefore, traders should always use leverage carefully and understand the risks before trading.
2. Margin
Margin is the amount of money required to open and maintain a trade.
When a trade is opened, the broker will set aside part of your account balance as margin. This amount is locked while the trade remains open. Once the trade is closed, the margin is released back into your account.
3. How to Calculate Margin
The basic formula is:
Margin = Asset Price × Contract Size × Lot Size ÷ Leverage
Example:
If you open a 5-lot EUR/USD buy position at 1.35000 with 1:200 leverage:
1.35000 × 100,000 × 5 ÷ 200 = $3,375
This means you need at least $3,375 as margin to open this position.
4. Free Margin
Free margin is the amount of usable funds in your trading account.
It shows how much money is still available after margin has been used for open trades.
Free Margin = Equity − Margin
Free margin is important because it tells traders whether they still have enough available funds to open new positions or maintain current trades.
5. Balance
Balance refers to the money in your trading account after closed trades only.
Open trades do not affect your balance until they are closed.
Example:
If your account balance is $50,000 and your open trade is currently making $5,000 profit, your balance will still show $50,000. Once you close the trade, your balance becomes $55,000.
6. Equity
Equity shows the real-time value of your trading account, including open profits or losses.
Equity = Balance + / − Floating Profit or Loss
Example:
If your balance is $50,000 and your open trade is currently losing $10,000, your equity will show $40,000.
7. Spread
Spread is the difference between the bid price and the ask price.
The bid price is the price at which you can sell.
The ask price is the price at which you can buy.
The difference between these two prices is called the spread. It is one of the main trading costs.
8. Types of Spread
There are two common types of spread:
Fixed Spread
The spread stays the same regardless of market movement.
Variable Spread
The spread changes depending on market conditions, liquidity, and volatility.
9. Commission
Commission is a fee charged by a broker or financial intermediary for executing trades.
Some brokers charge commission per trade, while others may include the cost inside the spread.
Common commission types include:
Fixed Commission
A fixed fee charged based on trade size.
Tiered Commission
The commission rate decreases when trading volume increases.
10. Swap
Swap is an overnight fee or credit applied when a trading position is held overnight.
It is mainly based on the interest rate difference between the two currencies in a forex pair.
Swap can be:
Positive Swap — you receive interest.
Negative Swap — you pay interest.
Swap rates may vary depending on the broker and the currency pair.
