FX & CFD mechanics: speak broker

BeginnerDuration ~30 min reading + 20 min hands-onTools A broker spec sheet (any MT5 broker site), A calculator

Why this lesson

Every number you’ll measure later — spread cost, swap, R-multiples, expectancy — is denominated in the units on a broker’s spec sheet. If you can’t read that sheet fluently, you can’t measure a single trade honestly, and cost-blind measurement is the domain’s number-one beginner killer. This lesson makes the vocabulary automatic so nothing after it trips you.

The explainer

Start with the atom. A pip is the standard smallest price increment for a currency pair. For most pairs quoted to four decimals (EUR/USD at 1.0850) a pip is the fourth decimal, 0.0001. Modern brokers quote a fifth decimal — the pipette or fractional pip — so 1.08501 is a half-pip above 1.08496. For yen pairs quoted to two decimals (USD/JPY at 156.20) a pip is the second decimal, 0.01. “Point” is used loosely: on MT5 a “point” usually means that last displayed digit (the pipette), so always read whether a broker means pip or point. BabyPips walks the arithmetic cleanly (Pips and Pipettes).

Size is measured in lots. A standard lot is 100,000 units of the base currency; a mini lot is 10,000; a micro lot is 1,000. This is the contract size, and it converts a price move into money: on a standard EUR/USD lot, one pip is worth about $10; on a mini lot, about $1. You almost never post $100,000 of your own cash to trade a standard lot — which brings in the two words that cause most retail blow-ups.

Leverage lets you control a large position with a small deposit; 30:1 leverage means $1,000 controls $30,000 of notional. Margin is the deposit the broker locks up as collateral for that position — at 30:1, required margin is 1/30, about 3.33% of notional. These are two views of the same coin: leverage is the ratio, margin is the cash. BabyPips ties them together with worked examples (Lots, Leverage, and Profit and Loss). Leverage is not free power. It is the mechanism that turns a normal-looking price wiggle into a wiped account, which is exactly why regulators capped retail FX leverage on major pairs at 30:1 in 2018 after studying the loss data (ESMA intervention measures).

Now the account plumbing. Your balance is the cash from closed trades; your equity is balance plus or minus the floating profit or loss of positions still open. Equity is the live number that matters — it’s what the broker watches. When open losses eat your equity down toward your used margin, the broker issues a margin call (a warning that you’re low on collateral) and, if it keeps falling, hits the stop-out level — a threshold, often stated as a percentage of required margin (say 50%), at which the broker automatically closes your positions to stop the account going negative. You don’t get a vote. The spec sheet always states the stop-out level; know yours before you fund an account.

Two more mechanics. Every price is really two prices: the bid (what you can sell at) and the ask (what you can buy at). The gap between them is the spread, and it is a cost you pay on entry — you buy at the higher ask and, to exit, sell at the lower bid. Going long means buying, betting the price rises; going short means selling first, betting it falls (CFDs let you short as easily as you go long). You’ll cost these out in Lesson 1.3.

Finally, a protection that exists because people got destroyed without it: negative balance protection. Under the same 2018 ESMA rules, retail brokers in Europe (and many elsewhere by policy) cannot let a retail account fall below zero and then bill the client for the shortfall (ESMA measures). Before this rule, a violent gap could leave clients owing the broker money — not a hypothetical, as Lesson 1.2’s SNB case will show. When you read a spec sheet, “negative balance protection: yes” is not marketing garnish. It caps your worst case at the money in the account.

That’s the whole vocabulary: pip, lot and contract size, bid/ask, long/short, leverage, margin, margin call, stop-out, balance vs equity, negative balance protection. Every later measurement rides on these words. Don’t move on until they feel boring.

Do it

You’re going to read a real spec sheet and fill in a card you’ll reuse all through Level 1.

1. Pick any MT5 broker and open its “trading conditions,” “instrument specifications,” or “contract specifications” page. (IC Markets, Pepperstone, XM, Exness, and Vantage all publish these openly.)
2. For EUR/USD, record: contract size (units per lot), pip value per standard lot, typical spread in pips, maximum retail leverage, and required margin percent.
3. Find and write down the account-level numbers: the margin call level and the stop-out level (both usually given as a percentage of used margin), and whether negative balance protection applies to retail accounts.
4. Do one conversion by hand to prove you can: at the broker’s stated leverage, how much margin (in USD) is locked to open one standard lot of EUR/USD at 1.0850? Notional = 100,000 × 1.0850 = $108,500; margin = notional ÷ leverage. At 30:1 that’s about $3,617.
5. Sanity-check the pip value: if one pip on a standard lot is about $10, how many pips of adverse move would it take to lose the margin you just calculated? Write the number down. That figure is your first felt sense of what leverage does.

Save this as broker-spec.md. Lessons 1.3 and 1.5 build directly on it.

Terms introduced

Terms introduced in this lesson

• pip
• lot
• contract size
• bid/ask
• long/short
• leverage
• margin
• margin call
• stop-out
• equity vs balance
• negative balance protection

Each term links to the glossary, where it is defined by the way you just used it.

Check

Check yourself

1. For EUR/USD quoted to five decimals, a "pip" is a move in the:

   fourth decimal (0.0001)first decimal (0.1)fifth decimal (0.00001)second decimal (0.01)

2. A standard lot in FX is:

   10,000 units1,000 units of the base currencywhatever the broker decides that day100,000 units

3. The bid/ask spread is:

   the broker's overnight interest chargethe maximum you can lose on a tradea government tax on each tradethe gap between the price you can sell at and the price you can buy at

4. Since the 2018 ESMA rules, retail FX leverage on major pairs is capped at roughly:

   5:130:1100:1500:1

5. Negative balance protection means:

   the broker cannot chase you for more than the money in your accountyou get a refund if the trade losesyour stops are guaranteed to fill at your priceyour account can never show a loss

Check answers

You can move on when you can… read any broker spec sheet — pip/point, lot and contract size, leverage, margin, margin call, stop-out level, negative balance protection, equity vs balance — without looking a term up.

Mark this lesson complete

Go deeper

• BabyPips School of Pipsology — the mechanics chapters own this material for free: Pips and Pipettes, Lots, Leverage, and Profit and Loss, and Margin Call Exemplified. Read the mechanics; skip its technical-analysis “strategy” content, which is off-syllabus here.
• ESMA’s CFD intervention notice — the source for the 30:1 cap and negative balance protection. Worth reading to see why these limits exist.
• The book that owns this topic: Carver’s Leveraged Trading treats leverage and position size as one connected decision rather than two separate mechanics — the right mental model to carry into Level 2.