Instruments · Forex Glossary
Basis Point — Definition & Meaning in Forex Trading
A clear, practical definition of basis point written for EU retail forex traders.
Quick Answer
Basis Point: One hundredth of a percentage point (0.01%). Used primarily to measure changes in interest rates and bond yields. A central bank raising rates by 25 basis points increases them by 0.25%. In forex, basis point changes in rates drive significant currency movements.
What does Basis Point mean?
Basis Point is a instruments concept every forex trader should understand. One hundredth of a percentage point (0.01%). Used primarily to measure changes in interest rates and bond yields. A central bank raising rates by 25 basis points increases them by 0.25%. In forex, basis point changes in rates drive significant currency movements. Traders encounter basis point throughout day-to-day decision-making, and a solid grasp of the idea helps avoid costly mistakes — especially for EU retail traders operating under ESMA rules where leverage caps, negative balance protection, and investor compensation schemes all intersect with practical trading concepts like this one.
How is Basis Point used?
In practice, Basis Point sits at the core of how EU retail traders access financial markets. Understanding the mechanics of basis point — including costs, leverage caps, and settlement rules — is essential before opening a live position. Every ESMA-regulated broker is required to provide a Key Information Document (KID) explaining the structure of instruments like basis point.
Example
For example, a newcomer opening their first EU-regulated forex account will encounter basis point within the first few minutes of the onboarding process — it is a foundational concept that appears in broker documentation, platform tooltips, and trader education modules alike.
Related Terms
Other instruments concepts worth knowing.
CFD
Contract for Difference. A derivative product that allows traders to speculate on price movements without owning the underlying asset. Most retail forex trading in the EU is done via CFDs.
Cross Pair
A currency pair that does not include the US dollar. Examples include EUR/GBP, EUR/JPY, and GBP/CHF. Cross pairs can have wider spreads than major pairs.
Exotic Pair
A currency pair that includes one major currency and one currency from an emerging or smaller economy, such as USD/TRY or EUR/ZAR. Exotics typically have wider spreads and higher volatility.
Major Pair
A currency pair that includes the US dollar and one of the other most traded currencies: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, NZD/USD, and USD/CAD.
ADR (American Depositary Receipt)
A certificate issued by a US bank representing shares in a foreign company trading on US exchanges. ADRs allow US-based trading of international stocks. Some forex brokers offer ADR CFDs alongside currency pairs.
Bond
A debt instrument issued by governments or corporations to raise capital. Bonds pay periodic interest (coupon) and return the principal at maturity. Bond yields and prices influence forex markets through interest rate expectations and capital flow dynamics.
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Frequently Asked Questions
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