Forex and CFD glossary: key terms explained

Core pricing terms

**Pip.** The smallest standardised price move in a forex pair: 0.0001 (one basis point) for most major and minor pairs quoted to four decimal places; 0.01 for JPY pairs quoted to two decimal places. On a standard lot (100,000 units) of EUR/USD, one pip is worth approximately USD 10. The pip is the unit in which spreads and price movements are typically quoted.

**Pipette (fractional pip).** A one-tenth pip increment — the fifth decimal place for most pairs, the third for JPY. Many brokers now quote to five decimal places, making pipettes the smallest visible increment. A spread of 0.6 pips is 6 pipettes.

**Spread.** The difference between the bid (sell) price and the ask (buy) price at the same moment. The spread is the most visible trading cost. A EUR/USD spread of 0.8 pips means you start every position 0.8 pips behind. Spreads widen during volatile or illiquid periods — particularly around major economic data releases.

**Bid and ask.** The bid is the price at which you can sell; the ask (or offer) is the price at which you can buy. You always buy at the higher ask and sell at the lower bid, so the spread is the immediate cost of entry.

**Basis point.** One hundredth of one percent (0.01%). Used to express interest-rate changes, swap rates and sometimes spreads in fixed-income and FX contexts. A central bank raising rates by 25 basis points moves the rate from, say, 4.00% to 4.25%. In forex, a basis point equals one pipette on a four-decimal pair.

**Quote currency and base currency.** In a currency pair such as EUR/USD, the EUR is the base currency and the USD is the quote currency. The price states how many units of the quote currency equal one unit of the base. Profit and loss on a standard lot is realised in the quote currency.

**Cross pair.** A currency pair that does not include the USD as either the base or the quote — for example EUR/GBP or GBP/JPY. Cross pairs tend to have wider spreads than major USD pairs because liquidity is lower.

**Major pair.** The seven most-traded currency pairs, all involving the USD: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD, NZD/USD. Majors have the tightest spreads and the deepest liquidity.

**Minor pair (currency minor).** Liquid pairs not involving the USD — EUR/GBP, EUR/JPY, GBP/JPY and similar. Spreads are typically wider than majors; ESMA applies the same 30:1 leverage cap to non-major pairs as it does to majors, except for more volatile minors where the cap may be lower.

**Exotic pair.** A major currency paired with the currency of an emerging or smaller economy — EUR/TRY, USD/ZAR. Very wide spreads, high overnight financing costs, and leverage caps tighter than 30:1.

Cost and fee terms

**Commission.** A per-trade fee charged on top of the spread, typically expressed per standard lot per side (e.g. EUR 3.50 per lot). Commission accounts quote tighter spreads but add the commission; spread-only accounts have wider spreads with no explicit commission. To compare like for like, add the spread cost and the round-trip commission.

**Swap (overnight financing).** The daily charge (or, occasionally, credit) for holding a leveraged position past the broker's daily cut-off, typically 22:00 UK time. It reflects the cost of the implicit borrowing in a leveraged position adjusted for the interest-rate differential between the two currencies. On a standard lot of EUR/USD held for five days, the swap can be a more significant cost than the entry spread.

**Rollover.** The process of extending an open position past the settlement date, resulting in the application of the overnight financing (swap) charge. All CFD positions roll automatically; no trader action is required, but the cost is applied daily.

**All-in cost.** The true cost of a trade: spread + commission + financing for the holding period + any non-trading fees (inactivity, currency conversion, withdrawal). The advertised spread is the least complete cost figure; the all-in cost is the only one that tells the truth for a given account type and holding duration.

**Inactivity fee.** A periodic charge some brokers apply when an account has not placed a trade for a defined number of months. Check the broker's fee schedule; inactivity fees can erode small balances significantly.

**Currency conversion fee.** If your trade is in a currency different from your account base currency, the broker converts the P&L and may charge a conversion spread or fee. For a GBP-base account trading EUR/USD, every P&L realisation involves a USD-to-GBP conversion.

Leverage, margin and risk mechanics

**Leverage.** The ratio between the position size you control and the margin you put up. At 30:1, a margin of EUR 3,333 controls a position worth EUR 100,000. Leverage magnifies gains and losses symmetrically. Under ESMA rules, retail leverage on major currency pairs is capped at 30:1; lower caps apply to more volatile instruments.

**Margin.** The deposit required to open and maintain a leveraged position. There is an initial margin to open the position and a maintenance margin to hold it. Margin is denominated in the account's base currency. It is not a fee — it is reserved collateral — but it is returned when the position closes (net of P&L).

**Margin call.** A notification that your account equity has fallen towards the maintenance-margin level, requiring you to add funds or reduce exposure. Under EU/UK rules, a broker must close out a retail client's open positions when account equity falls to 50% of required margin (the margin-close-out rule). A margin call is a warning; the close-out at 50% is the automatic mechanism.

**Margin-close-out rule.** The ESMA-mandated rule that a retail client's positions must be closed when account equity falls to 50% of required margin across all open positions. This limits the distance a losing position can travel before it is cut. It is a loss-limiter, not a loss-preventer.

**Negative-balance protection.** The ESMA/FCA requirement that a retail client cannot lose more than the total funds in their trading account. If a violent market move pushes a position further than the account balance, the broker absorbs the shortfall. It applies per-account and only to retail-classified clients of EU- or FCA-regulated entities.

**Slippage.** The difference between the price at which you placed an order and the price at which it was executed. Slippage occurs in fast-moving markets or at low liquidity — around news events, early morning or at market open. It can be positive (you got a better price) or negative (you got a worse one). Guaranteed stop-loss orders remove execution slippage at a cost.

**Guaranteed stop-loss order (GSLO).** A stop-loss that is guaranteed to execute at the specified price regardless of gapping or slippage, for a premium (a wider spread or fee). Useful when holding over news events or overnight. Not available on all brokers or all instruments.

**Requote.** A notification from the broker that the price you requested is no longer available and offering a different price. Common in manual (dealer) execution models; less common in STP and ECN models. A pattern of requotes on favourable moves (but not unfavourable ones) is a conflict-of-interest signal.

**Gapping.** When price jumps from one level to another without trading at the intermediate prices — typically on a weekend open or around a major announcement. A position's stop-loss may be triggered at the gap price, not the stop level, unless a GSLO is in place.

**Risk-reward ratio.** The ratio of the potential profit target to the potential loss on a trade, expressed as e.g. 2:1 (risk 50 pips to target 100 pips). It informs position sizing and expectancy calculations but does not determine outcome — a 2:1 ratio trade still has a defined probability of losing. See our risk-management guide for practical context.

**Drawdown.** The peak-to-trough decline in an account balance over a period. Maximum drawdown is the largest such decline from peak to subsequent trough. It is a risk metric for a strategy or an account, not a per-trade concept.

Account and execution model terms

**Lot.** The standard unit of trade size in forex. A standard lot is 100,000 units of the base currency. A mini lot is 10,000 units; a micro lot is 1,000 units. Position size in lots determines the pip value and therefore the euro/pound exposure per pip of movement.

**CFD (Contract for Difference).** A derivative contract between a trader and a broker where the difference in price of an underlying asset between the open and close of the position is settled in cash. CFDs give exposure to currency pairs, indices, commodities and shares without owning the underlying. They are leveraged products; the ESMA retail rules (leverage cap, negative-balance protection, bonus ban) apply to all CFD products offered to EU and UK retail clients.

**Spread-only account.** An account model where the broker's charge is incorporated into a wider spread, with no explicit per-trade commission. Simple to understand; total cost depends entirely on the spread width.

**Commission account (raw/razor account).** An account that quotes a tight, near-raw spread and charges a separate per-lot commission each way. Better for traders placing large or frequent trades where the narrower spread saves more than the commission costs.

**ECN (Electronic Communications Network).** An execution model that routes orders directly to a pool of liquidity providers (banks, other brokers, institutional participants), usually without a dealing desk. ECN brokers typically offer tighter spreads and charge a commission. True ECN means the broker profits from commission, not from the trade outcome.

**STP (Straight-Through Processing).** Orders pass directly to liquidity providers without manual intervention. Similar intent to ECN but the internals vary by broker. Both ECN and STP are contrast positions against the market-maker model, where the broker internalises (takes the other side of) trades.

**Market maker.** A broker that takes the other side of client trades internally, profiting from the spread. Market makers do not inherently expose clients to worse outcomes, but the conflict of interest is structural — the broker profits when the client loses on an internalised trade. Regulated EU/UK market makers must still meet best-execution obligations.

**Demo account.** A simulated account using virtual funds where traders can test a platform and strategy without risking real money. Demo conditions (spreads, execution, liquidity) often differ from live conditions, particularly in fast markets. Useful for platform familiarisation; not a reliable simulator of live execution.

**Islamic account (swap-free account).** An account variant that removes overnight financing (swap) charges, typically replacing them with an administrative fee or a wider spread, to meet an interpretation of Islamic finance principles that prohibit riba (interest-based charges). Spreadwise is a European-focused desk; Islamic accounts are not a primary theme here but are noted where they exist for a listed broker.

Regulatory and legal terms

**ESMA (European Securities and Markets Authority).** The EU-level financial markets regulator. ESMA introduced product-intervention measures for retail CFDs in 2018 — the 30:1 leverage cap, negative-balance protection and bonus ban — which national regulators subsequently made permanent. ESMA does not directly supervise individual firms; national regulators (BaFin, AMF, CONSOB, CNMV, KNF, AFM, CySEC) do.

**MiFID II (Markets in Financial Instruments Directive II).** The EU legislative framework governing investment services and markets, in force since January 2018. MiFID II requires broker authorisation, best-execution obligations, product governance, cost disclosures (KID), and the retail/professional client classification. It is the legal basis for EU brokers passporting into other member states.

**KID (Key Information Document).** A standardised pre-sale disclosure document required for packaged retail investment products (PRIIPs) including CFDs. The KID must state the risk-reward profile, costs, and the firm's own estimated percentage of retail accounts that lose money on the product. It is mandatory reading before opening an account; regulators require it to be given before you sign up.

**Authorisation vs registration.** Authorisation (or 'full permission') means a firm has been assessed and approved by a regulator to perform specific regulated activities. Registration is a lighter category — for example, a firm may be registered as a credit institution but not authorised to deal in investments as principal. Confirm the firm is authorised for CFD dealing specifically, not merely registered.

**Passporting (MiFID II passporting).** A firm authorised in one EU member state can provide investment services in other member states under MiFID II without obtaining a separate local licence, provided it notifies the home regulator. An entity authorised by CySEC in Cyprus can legally serve German or Dutch retail clients; the CySEC authorisation is the relevant licence. Post-Brexit, UK firms no longer benefit from MiFID II passporting into the EU.

**FCA (Financial Conduct Authority).** The UK's financial-services regulator, supervising firms under the Financial Services and Markets Act 2000 (FSMA). Post-Brexit the UK runs its own regime, but the FCA broadly mirrors ESMA's retail CFD rules — 30:1 leverage cap on majors, negative-balance protection, bonus ban — and adds the s.21 financial-promotions regime and the Consumer Duty (2023). UK firms need FCA authorisation for a UK retail audience; EU passporting no longer applies.

**Consumer Duty.** The FCA's rules in force since July 2023 requiring firms to deliver good outcomes for retail customers — not merely avoiding harm but actively ensuring products are suitable, communications are clear and value is delivered. It is a higher standard than the previous 'treat customers fairly' principle and applies across the full customer journey.

**Clone firm.** A scam operation that copies the name, licence number and registered details of a genuinely authorised broker to appear regulated. See our dedicated guide for the full check sequence.

**Offshore arm.** A legal entity belonging to a regulated broker group that is incorporated in a lightly regulated offshore jurisdiction — Seychelles, Bahamas, Cayman Islands and similar. ESMA retail protections do not apply to offshore-arm accounts. The tell is that your client agreement is with an entity that is not on any EU or FCA register.

**Loi Sapin II (France).** A 2016 French law that, among other measures, bans electronic advertising of high-risk speculative products including CFDs to retail clients in France. The consequence for European forex affiliate publishers: France is information-only; no partner links or 'open an account' CTAs are permissible.

**CNMV 2023 rules (Spain).** Regulatory guidance issued by Spain's CNMV in 2023 restricting mass-marketing of CFDs to retail clients and banning influencer and sponsorship promotion of these products. Spain is information-only on Spreadwise for the same reason as France.

Execution and order types

**Market order.** An instruction to buy or sell immediately at the best available price. Fast execution; subject to slippage in volatile conditions.

**Limit order.** An instruction to buy below the current price or sell above it (i.e. at a price more favourable than current). Executed only if the market reaches the limit price. No slippage, but no guarantee of execution if the level is not reached.

**Stop order.** An instruction that becomes a market order when price reaches a specified level. A stop-loss closes a losing position at a pre-defined price; a stop-entry opens a new position when price moves through a trigger level. Both are subject to slippage unless guaranteed.

**Trailing stop.** A stop-loss that moves automatically in the direction of profit as the position moves favourably, by a fixed number of pips or percentage. If price reverses, the trailing stop stays at its highest (for long positions) and closes the position if the reversal hits it.

**Take-profit order.** An instruction to close a position automatically when it reaches a specified profit level. Commonly used in combination with a stop-loss to define the risk-reward ratio on entry.

**One-Cancels-the-Other (OCO).** Two orders placed simultaneously where the execution of one automatically cancels the other — typically a limit order above and a stop order below the current price. Used when the trader is uncertain of direction but wants to act on a breakout in either way.

Sources & further reading

• ESMA — product intervention measures for retail CFDs
• FCA — Financial Services Register (UK)
• BaFin — register (Germany)