Glossary of CFD and leveraged trading terms

What the glossary covers

The glossary covers seventy terms across four groups. Quote terms make up the first group: ask, bid, spread, pip, lot, long, short and exposure. The second group looks at margin and leverage, taking in initial and maintenance margin, margin level, margin call, close-out and negative balance protection. Holding a trade carries its own costs and mechanics, so the third group tackles financing, rollover, dividend adjustments, contango, backwardation and expiry. Rules and analysis form the last group, with retail and professional clients, product intervention, expectancy and drawdown.

If a definition includes a figure, the source document is cited. Usually, that’s a measure from ESMA or the FCA (ESMA Decision (EU) 2018/796 and FCA PS19/18).

How to use the glossary

You can use the glossary in three ways. The glossary is sorted alphabetically in the language of each edition.

Follow a link from any article. A term in the text links to its definition here. Each definition links back to the page that explains the idea, such as leverage and margin or costs and fees.
Read it as a primer. The margin, margin level and margin close-out entries work together to show you how most losing accounts meet their end.
Quote it. Each entry has a fixed address, and the terms of use let you quote it as long as you say where it came from.

Terms

Terms are listed alphabetically. Standard English market terms like pip, spread and lot keep their usual form in every edition.

Ask price

The ask price is what you pay to buy. It’s the higher of the two prices in a provider’s quote. You open a long CFD trade at the ask and close a short trade at it. The gap between the ask and the bid is the spread.

Backtesting

Backtesting means running a trading rule over past prices to see how it would have performed. A backtest that leaves out costs, or that was used to pick the rule in the first place, makes the rule look better than it is (technical analysis, expert advisors).

Backwardation

Backwardation is when later futures contracts are priced lower than nearer ones. Backwardation usually comes about when supply is tight right now. When a trade is rolled in backwardation, a short position pays at the roll and a long position benefits.

Base currency

The base currency is the first one listed in a currency pair, and it’s the currency whose value the price shows. For EUR/USD at 1.1000, one euro, the base, buys 1.1000 US dollars. Buying the pair means you’re buying the base currency.

Bid price

The bid price is the price you receive when you sell. It’s the lower price in a provider’s quote. You open a short CFD trade at the bid, and close a long trade at this price.

Carry trade

A carry trade is a currency trade you keep open to collect the difference between the two countries’ interest rates. That difference is credited to you every night. The trade works while the exchange rate holds steady. It fails when high-yielding currencies drop at the same time (trading strategies).

Client-money segregation

Client-money segregation means your provider holds your deposits separately from its own money. If the company that opens your account is regulated in the EU or the UK, it must keep client funds apart. So the provider cannot use them and its creditors cannot use them either. This segregation protects you if the provider fails, but it doesn’t protect you from trading losses.

Commission

Commission is a fee you pay on each trade, mostly on share CFDs. It’s charged as a percentage of the notional value or a fixed amount per share, once when you open and again when you close. Where an instrument has no commission, the provider takes its pay through the spread instead.

Contango

Contango is when futures contracts with later dates are priced higher than those with nearer dates, usually because of storage costs. When a long futures-based CFD is rolled in contango, it moves to a higher price at each roll (commodities trading).

Contract for difference CFD

A contract for difference is a deal with a provider that pays out the change in an asset’s price, without you owning the asset. You and the provider settle the difference between the price when the contract opens and the price when it closes, in cash. A CFD is leveraged because you only put down margin, not the full value (what are CFDs).

Contract size

Contract size is how much of the underlying asset a single CFD contract represents. The underlying is the asset the CFD tracks. Your provider lists the contract size in its contract specification. The size might be one share, one index point, one lot of currency, one barrel or one ounce. From this figure you get your profit or loss for every point the price moves.

Correlation

Correlation describes how two instruments tend to move in the same direction. When you have trades that seem independent but are correlated, they combine into a single larger position across your account. That matters because the close-out rule works on your whole account (risk management).

Counterparty

The counterparty to a CFD is always the provider, the other side of your trade. The provider takes the other side of every trade and holds every deposit. Counterparty risk is the chance the provider can’t pay you. Authorisation and keeping client money separate are there to deal with it (choosing a provider).

Cross pairs (minors)

Cross pairs, also known as minor pairs, are currency pairs that exclude the US dollar, such as EUR/GBP or EUR/AUD. They usually have wider spreads than pairs involving the dollar. The retail leverage cap depends on the two currencies, not the dollar. At a company regulated in the EU or the UK, a cross made from two of the six currencies on the legal list, like EUR/GBP or EUR/JPY, is treated as a major pair and has 30:1. Any other cross, such as EUR/AUD, has 20:1 (ESMA Decision (EU) 2018/796). At a company regulated in Australia, the list includes the Australian dollar, so EUR/AUD has 30:1 (ASIC order).

Demo account

A demo account is a replica of a provider’s platform, using pretend money and live or delayed prices. It shows you how the platform works. What a demo doesn’t copy is how orders are really filled, the wider spreads around news, the account size you’d really fund or how you behave when real losses happen (demo accounts, how to start trading).

Dividend adjustment

A dividend adjustment is a cash entry your provider makes when a share pays a dividend. The ex-dividend date marks when a share, or a share in an index, begins trading without its next dividend. On that date the provider credits long positions by the dividend amount and debits short positions by the same sum. The price drop that follows therefore leaves you with no gain or loss (shares and crypto CFDs).

Drawdown

A drawdown is how far your account’s equity falls from a high point to a later low, shown as a percentage. Recovering takes a gain that grows faster than the drawdown itself. After losing half your account, for example, you have to double what’s left just to get back to where you were (risk management).

Economic calendar

The economic calendar is the published timetable of data releases and policy decisions. For each one, the calendar shows the last reported figure and the consensus forecast. The consensus forecast is the average of what economists expect. Markets react to the difference between the release and that consensus (fundamental analysis, economic calendar).

Equity

Equity is your account’s current value: your balance added to the profit or loss from your open trades. It moves with every price tick. Your margin level and the close-out rule are both measured against equity.

Exotic pairs

Exotic pairs pair a major currency with one from a smaller or emerging economy. They come with wide spreads, thin trading and large differences in the two countries’ interest rates. At a company regulated in the EU or the UK, every pair that isn’t a major, including exotics, gets the 20:1 retail leverage cap (ESMA Decision (EU) 2018/796).

Expectancy

Expectancy is how much a strategy makes or loses per trade on average, after costs. To calculate it, take the win rate times the average win, minus the loss rate times the average loss, minus the cost per trade. Only a strategy with positive expectancy can work (trading strategies).

Expiry

Expiry is the date when a futures contract stops trading, and a CFD based on that contract stops trading too. Cash CFDs have no expiry. They charge daily financing for as long as you keep them open instead.

Exposure

Exposure is the full size of a trade, or of all your trades together. It’s the amount a price move applies to. If the price moves by one per cent, you gain or lose one per cent of your exposure. Exposure is the notional value of your positions, and a platform shows exposure as the size of your risk. Your exposure is not your margin.

Free margin

Free margin is the money in your account not used as margin. It’s also known as free equity or available funds. You calculate it by subtracting the margin on open trades from your equity. You can use it to open new trades or to cover losses. It drops by the same amount as any loss on an open trade.

Fundamental analysis

Fundamental analysis examines the economic, financial and physical realities that set an asset’s value. For currencies, that means interest rates. For shares and indices, it means company earnings. And for commodities, it means supply and demand (fundamental analysis).

Futures contract

A futures contract is an agreement to buy or sell an asset on a fixed date, and it is traded on an exchange. Most commodity and index CFDs take their price from a futures contract. A futures-based CFD expires when its contract does and is then rolled into the next one.

Gap risk

Gap risk is the risk that a price jumps from one level to another with no trading in between. A gap happens at a market open or on news. The risk is highest on shares around company results and on indices over the weekend. A stop-loss inside the gap then fills at the first price on the far side.

Hedging

Hedging means opening a CFD trade that runs opposite to something you already hold, so a gain on one offsets a loss on the other. You do it for a set period. Hedging is one of the genuine uses of CFDs and it costs financing every night you hold it (trading strategies, hedging in forex).

Initial margin

Initial margin is the deposit you need to open a trade. It equals the margin rate for the asset type times the trade’s full value at the opening price. For a retail client, if the company that opens your account is regulated in the EU or the UK, the rate can’t be lower than the minimum set for that asset class (ESMA Decision (EU) 2018/796).

Leverage

Leverage lets you control a trade bigger than your deposit. It’s the ratio between the trade’s full size, its notional value, and the margin held against it. With thirty to one, one unit of deposit controls thirty units. A move of one part in thirty against you then wipes out the entire deposit (leverage and margin).

See also: Margin, Notional value, Exposure

Limit order

A limit order asks your provider to open or close a trade only at the price you set, or a better one. Your price is protected, but the order may never fill, since the market may never reach your level.

Liquidity

Liquidity is how easily you can open or close a trade without shifting the price. It changes by instrument and by the time of day. With a CFD, you’ll see low liquidity as wider spreads and greater slippage (forex trading).

Long position

A long position is a CFD trade you open by buying, so you gain if the price rises but lose if it falls. You open the trade at the ask and close it at the bid. A long position pays overnight financing on most instruments.

Lot

A lot is a standard trade size in forex, representing one hundred thousand units of the base currency. A mini lot is a tenth of a lot, and a micro lot is a hundredth. CFD providers often let you trade fractions of a lot (pips and lots).

Maintenance margin

Maintenance margin is the equity you need in your account to keep a trade open. On most retail platforms it’s the initial margin worked out again at the current price. Where a provider sets a lower maintenance figure, that’s its own threshold. At a company regulated in the EU or the UK, the retail close-out rule is measured against the initial margin (ESMA Decision (EU) 2018/796).

Major pairs

In everyday market talk, major pairs are the currency pairs traded most, but the retail leverage rules use a fixed legal list instead. Under the EU and UK rules, a major pair is any pair made from two of these six currencies: the US dollar, euro, yen, pound, Canadian dollar and Swiss franc. If the company that opens your account is regulated in the EU or the UK, a pair on that list carries a leverage cap of 30:1 for retail clients. Under that cap, a trade can be at most thirty times the deposit behind it (ESMA Decision (EU) 2018/796). At a company regulated in Australia, the Australian dollar joins the list, making seven currencies in total, so AUD/USD is a major (ASIC order).

Margin

Margin is the deposit your provider holds while you have a CFD trade open. It’s a percentage of the trade’s full size, and that percentage changes with the kind of asset. The funds are kept aside, not used up. You receive them back when the trade closes, after any loss is taken out (leverage and margin).

Margin call

A margin call is your provider’s warning that your account is running low. It arrives when your margin level drops beneath a threshold the provider sets. The margin call asks you to add money or cut your trades. Nothing in the EU or UK retail rules says a margin call has to come before a close-out.

Margin close-out

Margin close-out is the rule that makes your provider close your trades when your account runs too low. If the company that opens your account is regulated in the EU or the UK, it must close a retail client’s positions. That happens once equity falls to 50 % of the total initial margin needed. The rule covers the whole account, not one trade at a time (ESMA Decision (EU) 2018/796 and FCA PS19/18). At a global company, trades are closed at whatever level its own terms set.

Margin level

Margin level tells you how well your account can support the trades you have open. It’s your equity divided by the margin needed, expressed as a percentage. Once you reach one hundred per cent, your free margin is gone. The retail close-out rule kicks in at fifty per cent at a company regulated in the EU or the UK (ESMA Decision (EU) 2018/796).

Market maker

A market maker is a provider that sets its own buy and sell prices and takes the other side of your trades itself. It holds those trades on its own books and handles the risk. The other model sends your orders to another firm. A provider’s execution policy tells you which model it follows.

Market order

A market order instructs your provider to open or close a trade immediately, using the next price that comes up. You won’t know the precise price beforehand, though the order will almost certainly be filled.

Negative balance protection

Negative balance protection means you can’t lose more than the money in your account. If the company that opens your account is regulated in the EU or the UK, the protection limits a retail client’s total liability on that account to the funds in it. So if the price moves straight through the close-out level, you can’t owe the provider money (ESMA Decision (EU) 2018/796). At a global company, negative balance protection may be a right, may be a courtesy or may be absent. The company decides which.

Non-trading fees

Non-trading fees are account charges that are not linked to any one trade. You’ll see inactivity fees, withdrawal fees, market data fees and currency conversion mark-ups among them. A fair cost comparison between providers has to include these (costs and fees).

Notional value

Notional value is the total worth of your trade. You get it by multiplying the trade size by the underlying’s current price. All profit, loss and financing calculations use this figure. A CFD’s leverage equals the notional value divided by the margin held.

See also: Exposure, Leverage, Contract size

One-cancels-the-other order OCO

A one-cancels-the-other order is a set of two orders where filling one cancels the other. You usually use it to place a take-profit and a stop-loss together. The pair lets you fix both exit points as soon as you open the trade.

Over the counter OTC

Over the counter describes a contract that two parties make directly with each other, not through an exchange. Every CFD is over the counter. That means the provider decides the price, the terms and how your order gets filled.

Overfitting

Overfitting is adjusting a trading rule too tightly to one set of past data, so it matches the random fluctuations in it. That rule appears effective on that data but performs no better than random on new data. It usually results from testing many variations of the rule and selecting the top performer.

Overnight financing (swap)

Overnight financing, also called swap or rollover, is the charge or credit for keeping a trade open past your provider’s daily cut-off. The amount is calculated on the full notional value of the trade, at a yearly rate tied to a benchmark interest rate (costs and fees).

See also: Rollover, Carry trade, Long position

Pip

A pip is the small unit that currency prices move in. On most currency pairs it equals one ten-thousandth, the fourth decimal place. On yen pairs it equals one hundredth. How much money a pip is worth depends on the size of your trade (forex trading, what is a pip).

Position sizing

Position sizing is working out how big a trade to open so that if you hit your stop-loss, it only costs a set share of your account. You do this by taking the amount you’re willing to risk and dividing it by the stop distance multiplied by the value per point (risk management, pips and lots).

Product intervention

Product intervention is the authority a regulator holds to restrict or ban a financial product. MiFIR gives ESMA and national regulators the ability to restrict or prohibit the marketing, distribution or sale of a financial instrument. The retail CFD measures of 2018 were introduced using this authority (Regulation (EU) No 600/2014 and ESMA Decision (EU) 2018/796).

Professional client

A professional client is a customer treated as experienced enough to bear the risks of investing, and is given fewer protections. Institutions are professional clients automatically. Others can ask to be treated as a professional client. Under MiFID II, a retail client of a company regulated in the EU can opt up if they meet two of three criteria. One of the criteria for opting up is a portfolio of cash deposits and financial instruments above €500,000. Opting up means giving up every retail protection that company gives (Directive 2014/65/EU, professional accounts).

Profit and loss P&L

Profit and loss is how much a trade has made or lost. P&L is unrealised while the trade stays open, changing with every price move. The figure becomes realised when you close the trade. Your statement shows both unrealised and realised profit and loss, plus financing and adjustments.

Quote currency

The quote currency is the second currency in a pair, the one the price is given in. In EUR/USD the dollar is the quote currency, because the price shows how many US dollars one euro buys. Profit and loss on the pair is calculated in the quote currency first, then converted into your account’s currency.

Retail client

A retail client is the standard type of customer and receives the strongest protections under EU and UK rules. Under MiFID II, the EU law that defines these categories, a retail client is formally anyone who is neither a professional client nor an eligible counterparty. Only retail clients benefit from the leverage caps, the close-out rule, negative balance protection, the ban on incentives and the risk warning. These protections apply if the company that opens your account is regulated in the EU or the UK (Directive 2014/65/EU and ESMA Decision (EU) 2018/796). A retail client of a global company gets only what that company’s own rules give.

Risk-reward ratio

The risk-reward ratio compares what you plan to lose if your stop-loss is hit with what you plan to gain if your take-profit is hit, for one trade. On its own the ratio tells you nothing. You need the win rate too, because the win rate and the risk-reward ratio together decide expectancy.

See also: Expectancy, Stop-loss, Take-profit

Rollover

Rollover has two meanings in CFD trading. The first is the daily cut-off when overnight financing is applied to your open trades. The second is shifting a futures-based CFD from an expiring contract to the next, with a cash adjustment for the price difference (indices trading).

Short position

A short position is a CFD trade you open by selling, so you gain if the price falls but lose if it rises. You open the trade at the bid and close it at the ask. On share CFDs, you may pay a borrowing charge and you may also pay the dividend.

Slippage

Slippage is the difference between the price you expected your order to fill at and the price it actually filled at. It occurs because the price moves between when you send the order and when it executes. Slippage is normal in fast markets, and it can go in your favour or against you (how a trade works).

See also: Market order, Liquidity, Gap risk

Spread

The spread is the difference between the buy price and the sell price. On a CFD quote, you work it out by taking the bid price away from the ask price. Every trade costs you the spread, since you open on one side of the quote and close on the other. Spreads widen at the market open, around news releases and overnight (costs and fees).

See also: Ask price, Bid price, Commission

Spread bet

A spread bet is a bet on how far a market’s price moves, with a stake placed for every point it moves. Like a CFD, it uses leverage and you never own the underlying asset. UK providers offer spread bets alongside CFDs, and the FCA’s limits for retail clients cover both (FCA PS19/18).

Standardised risk warning

The standardised risk warning is the fixed text a company regulated in the EU or the UK must show. The warning states what percentage of its own retail accounts lost money over the last twelve months. The loss figures you see in CFD adverts come from this warning (ESMA Decision (EU) 2018/796).

Stop-entry order

A stop-entry order opens a trade once the price hits a level you set beyond the current price. Traders use one to join a move that has already started, instead of guessing a move in advance. When the price reaches that level, the order becomes a market order.

Stop-loss

A stop-loss is an order that closes your trade if the price moves against you to a level you set. When the price hits that level, it becomes a market order. A price jump past the level means the order fills beyond it, so the loss at your stop is the least you can lose, not the most (risk management, stop-loss orders).

Support and resistance

Support and resistance mark price levels where a decline or advance has previously halted. Other traders keep an eye on these same levels, so they help when you’re placing orders. Prices do often break through them, though.

Take-profit

A take-profit is an order that closes your trade when the price moves in your favour to a level you set. You usually pair it with a stop-loss, so both ways out are fixed when you open the trade (stop-loss orders).

Technical analysis

Technical analysis looks at historical prices and trading volumes to work out where prices may move in the future. It reveals the path a market has taken and the levels where orders tend to gather. What it can’t do is spot events that haven’t happened yet (technical analysis, technical indicators, chart patterns).

Trading session

A trading session refers to the hours when a regional financial centre conducts business. The forex market cycles through the Asia-Pacific, European and American sessions one after another. The period when London and New York are both open is the most liquid time of the day.

Trailing stop

A trailing stop is a stop-loss that tracks the price as it moves in your favour. It maintains a fixed distance behind the price and holds still when the price reverses. If you place it too close, normal swings will trigger it (stop-loss orders).

Volatility

Volatility measures how far an instrument’s price swings over a given timeframe. It determines both the opportunity and the danger in a leveraged trade. ESMA set the EU’s retail leverage caps by asset class partly according to volatility (ESMA Decision (EU) 2018/796).

Sources

The original documents this page cites, in the order they first appear.

European Securities and Markets Authority, ESMA
Financial Conduct Authority, FCA
ESMA Decision (EU) 2018/796 of 22 May 2018 to temporarily restrict contracts for differences in the Union, Official Journal of the European Union (EUR-Lex), 2018-05-22
PS19/18: Restricting contract for difference products sold to retail clients, FCA, 2019-07-01
20-254MR ASIC product intervention order strengthens CFD protections, ASIC, 2020-10-23
Regulation (EU) No 600/2014 on markets in financial instruments (MiFIR), EUR-Lex, 2014-05-15
Directive 2014/65/EU on markets in financial instruments (MiFID II), EUR-Lex, 2014-05-15