Trading risk glossary: pip, lot, margin, leverage, spread and drawdown

Pip, point, lot and notional exposure

A pip is a conventional incremental price movement for many currency pairs, though quotation conventions vary. A lot is a trading-volume unit specified by the instrument. Notional exposure is the market value controlled by the position. A 0.10-lot forex position does not necessarily have the same exposure as a 0.10-lot gold CFD.

Our position-size calculator asks for actual pip value and units per lot, while the gold calculator uses troy ounces. This prevents a false universal lot assumption.

Spread, commission and swap

Spread is the difference between tradable bid and ask quotes. Commission is an explicit transaction charge. Swap or financing is an adjustment associated with holding certain positions across a broker’s rollover boundary. A trade can have no explicit commission but still cost money through spread or financing.

Leverage, margin and stop-out

Leverage describes exposure relative to required capital. Margin is the capital or collateral required for a position. A margin close-out or stop-out is the broker’s process for reducing positions when the account no longer meets its terms. A 10:1 illustrative ratio on $10,000 notional exposure implies $1,000 opening margin, but actual requirements vary.

Drawdown, slippage and strategy risk

Drawdown is a decline from a previous account-equity peak. Slippage is the difference between expected and actual execution price. Strategy risk includes model error, concentration and changing market conditions. For example, a 20% drawdown requires a 25% subsequent gain just to return to the starting amount.

• Ask for the unit behind each number.
• Identify the exact instrument contract.
• Read legal-entity and risk warnings.
• Distinguish a mathematical scenario from a performance forecast.