Forex Basics Concepts

Learning to trade the currency market is much easier for beginners when beginners start by studying the basics. This way the other concepts become much easier to learn because the new forex trader will have already learnt about the basic ideas before proceeding to the other concepts.

The Forex basics that traders should learn first before starting Forex trading are:

What's FX?

FX is the simultaneous buying and selling of one currency for another. Traders buy & sell currencies for speculation purpose and for the purpose of trying to earn a profit. Traders will buy a currency that they think will appreciate in value and sell the currency which they think will depreciate in its value.

In Forex traders buy currencies when the currencies become under-valued and sell currencies when the currencies become over-valued. This is the basic concept of trading forex, as a novice trader if you want to become successful when trading currencies you must learn to buy undervalued currencies and sell overvalued currencies. Many traders miss this concept & do the exact in the opposite trend buying overvalued currencies because that's when these currencies seem to be heading up & up and they sell under-valued currencies because they seem as if they'll continue moving lower.

Just like in stocks market successful trader buy stocks when the stocks price is low and sell the stocks when the price is high. This is the same market trading concept which traders should follow when they are trading currencies.

What's a Currency Pair?

Forex trading is the simultaneous exchange of one currency for another, for this reason currencies are traded and transacted in pairs known as currency pairs. For example EURUSD is the forex pair which traders who want to exchange EUROs for the America Dollars trade. In this currency pair the EURO is being traded against the USA Dollar.

What's a Currency Quote?

Because currencies are traded and transacted in pairs, the price at which these currencies are exchange is determined by currency quote. For example if EURUSD forex quote is 1.2500 it represents how much 1 EURO is worth in terms of America Dollars. 1.2500 currencies quote means that 1 Euro is equal to 1.2500 America dollars.

Currency quotes in Forex are quoted in the format of 4 decimal places.

What is a Pip?

Currency quote are quoted in the format of 4 decimal points. The last decimal place represents a Pip which is the smallest movement used to calculate profit and loss in currency market moves.

Pip means Price Interest Point: it's a one point move in the currency quote. For example if EURUSD currency pair is quoted as 1.2500, then 1 pip move will mean that the exchange rate will move up by one point to 1.2501 or down by one point to 1.2499.

If the EURUSD currency quote moves from 1.2500 to 1.2600, this would be a 100 pip movement in the forex quote & this pip(point) movement would be used in calculating the profit a forex trader would earn if they had opened a trade position at 1.2500 and closed it at 1.2600.

What is a Lot?

In currencies are transacted in units known as lots. The standard lot is made up of 100,000 units of currency. There is also the Mini lot which is made up of 10,000 units of currency and the Micro lot which is made up of 1,000 units of currency.

For 1 standard lot the profit is $10 per 1 pip, for mini lot the profit is $1 per pip and for micro lot the profit is $0.10 dollars per 1 pip. Hence, in the above example where the forex pair headed upward by 50 pips if a forex trader was trading using one standard lot then their trading profit would be $10 multiplied by 50 pips which is $500.

What is Leverage?

Because not a lot of traders can afford to trade 100,000 currency units or 10,000 units of currency, there's leverage in Forex which means that forex traders can borrow money & use the borrowed money to make trade transactions with. For example leverage of 100:1 means that a trader with capital of $10,000 can borrow up to 100 times using the 100:1 leverage option & therefore after borrowing using this leverage the forex trader will now have a total of $10,000 multiplied by 100, which means the trader will have a total of $1,000,000 & can therefore trade ten standard lots of $100,000 currency units. This leverage is what makes accessible to retail traders because these traders can begin with little capital of their own and use leverage to borrow the rest of the money required for trading. The money the trader deposits is referred to as a trader's margin and one can continue to borrow money using this leverage ratio as long as they have the required margin in their account. This is why the traders must have the required account balance in their account to open the trade transactions they want to, e.g. a trader using leverage 100:1 must have more than $1,000 in their trading account to be able to open & trade using standard lots.

What is Margin?

Margin is the specific amount of money which a trader is required to put aside in order and so as to continue holding an open leveraged trade position. Margin also can be presented as the deposit that a currency trader is required to keep so as to maintain this open trades. This margin is a percentage of account equity that has to be set aside and allocated as a margin for the open trades that are held by a currency trader.

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