What are you really trading?

Second Officer · SO01: Know What You Trade · About 25 minutes

Safety rule: Do not fund or trade a product you cannot explain in plain English.

Your mission today

By the end you can identify what a trading symbol actually represents, who provides it, and how money can be lost.

Before you start

You only need a notebook. Finish Cadet F02.2, which introduces contract sizes and trading costs. Open a demo platform if you have one, but do not place an order yet.

1. A price chart is not a product

Imagine two shops displaying the same gold price. One sells a physical gold coin. The other offers a contract whose value changes with gold. The price may look similar, but you own different things.

A chart labelled EURUSD shows a price for one euro in US dollars. That label alone cannot tell you whether you are exchanging money, entering a derivative contract, or viewing a reference price.

A derivative is an agreement whose value depends on something else, such as a currency or gold. A CFD, or contract for difference, usually settles the price change in cash. It does not normally give you ownership of the underlying asset. The exact rights depend on the legal agreement.

Always answer three questions before studying a trade: What contract is this? Who is my counterparty? What could I owe?

2. A worked example: the loss comes first

Every number here is imaginary. Assume a demo EURUSD derivative has these terms:

• One full lot represents EUR 100,000.
• You select 0.10 lot, representing EUR 10,000.
• Your opening price is 1.1000 US dollars for one euro.
• You close at 1.0980 after price falls.

The price change is 1.0980 − 1.1000 = −0.0020 USD per euro.

Your price result is EUR 10,000 × −0.0020 USD/EUR = −$20 before trading costs.

Now consider the opposite move. If the close were 1.1020 instead, the same calculation gives +$20 before costs. Neither outcome is promised. We are learning how a particular contract converts price movement into cash.

Suppose the imaginary broker asks you to set aside $220 as margin. That is not your worst possible loss. Margin is collateral that supports a position. A fast move, gap or poor fill can create a larger loss, subject to the account contract and applicable protections.

Do not copy these contract sizes or margin figures into a real order. Your broker's exact instrument specification controls.

Original Black Box Journey teaching illustration. Synthetic example; not historical market data.

3. Four products that can share a similar chart

Currency conversion: A bank exchanges one currency for another. You receive the purchased currency, subject to the service terms and costs.

Retail forex derivative: You hold a broker agreement linked to an exchange rate. The trade may be leveraged and cash-settled. Check the product disclosure.

Exchange-traded futures: A standardised contract trades under exchange and clearing rules. Each contract has a specified multiplier, settlement process and expiry or trading cycle.

Exchange-traded fund (ETF): You buy units or shares in a fund through a securities account. You own the fund interest, not necessarily the assets directly. The fund's holdings, fees and structure matter.

None is automatically safer or more profitable. They involve different contracts, protections, access rules, costs and risks. The task is to describe the differences without guessing from a candlestick.

4. Find the company behind the platform

A broker's trading-app name may differ from the legal entity named in your agreement. The legal entity is the company responsible for the service. A group can operate several entities in different countries.

Open the account agreement or product disclosure. Write down the company name and its jurisdiction. A counterparty is the party on the other side of an agreement. For some instruments your direct contractual relationship is with the broker; exchange-traded arrangements work differently.

Next, check the relevant official regulator's register. Search the exact legal entity, not just a familiar brand name. Being listed somewhere does not prove that every product or service is authorised for you. Record what the register actually confirms.

If the company, legal product or available protections remain unclear, use a demo account and do not deposit money.

5. Read the contract before the Buy button

For one demo symbol, find these fields in its specification:

Some answers come from the platform's symbol window. Others require the account agreement. If the two disagree, investigate. Do not invent a missing value to make the worksheet complete.

Common mistake

A beginner assumes every EURUSD chart represents the same contract. That can hide different units, fees, counterparties and protections. Fix it by reading the exact product terms before calculating a trade.

Plain-English glossary

• Underlying: The market price or asset a contract refers to.
• Derivative: A contract whose value depends on another price.
• CFD: A contract usually settling a price difference in cash.
• Counterparty: The party you have the relevant agreement with.
• Margin: Money set aside to support a leveraged position.
• Legal entity: The actual company named in a contract.

Try it yourself

Choose three demo instruments: EURUSD, gold and one index. Create a six-field comparison using the table above. Add the exact source and date for each answer. Mark unknown fields UNKNOWN, not zero. Record one reason you would refuse a live order. In your journal, save the worksheet and this sentence: I checked the agreement, not only the chart.

What you can now do

• Identify the type of contract behind a familiar chart.
• Calculate a simple adverse move using the stated units.
• Refuse a trade when key legal or contract information is missing.

Next lesson

SO01.2 · Contracts, Lots and Symbol Specifications. You will turn those specification fields into exact position units.