Forex Basics Concepts

Beginners grasp forex faster by hitting the basics first. This paves the way for tougher topics. New traders build on simple ideas before moving on.

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

What's FX?

FX means buying one currency while selling another at the same time. Traders do this to speculate and try to make a profit. They buy a currency they believe will go up in value, and sell the one they think will drop.

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 fx currencies and sell overvalued fx currencies. Many traders miss this concept & do the exact in the opposite trend buying overvalued fx 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.

Similar to stock market strategies, successful traders buy shares when prices are low and sell when prices are high. This fundamental principle applies equally to currency trading.

What's a Currency Pair?

Forex trading is the simultaneous exchange of one currency for another, for this reason forex currencies are traded and transacted in pairs known as currency pairs. E.g. EUR USD 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 AUS Dollar.

What's a Currency Quote?

Because currencies are traded and transacted in pairs, the price at which these currencies are exchanged is determined by forex currency quote. E.g. if EUR USD forex quote is 1.2500 it represents how much 1 EURO is worth in terms of US Dollars. 1.2500 forex quote means 1 Euro is equal to 1.2500 USA dollars.

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

What is a Pip?

Currency quotes are commonly displayed up to four decimal places, with the last digit representing a pip. Pips signify the smallest price movement used to calculate profit and loss in Forex trading.

Pip stands for Price Interest Point. It means a one-point change in a forex quote. For EUR/USD at 1.2500, a pip up goes to 1.2501. Down goes to 1.2499.

A 100 pip shift in the forex rate would occur if the EUR USD currency pair went from 1. 2500 to 1. 2600, and this pip(point) change would be used to determine the profit a forex trader would make if they had started a trade position at 1. 2500 and ended it at 1. 2600.

What is a Lot?

Currencies are exchanged in amounts called lots. A typical contract/lot contains 100,000 currency units. There's also the Mini contract/lot, which contains 10,000 currency units, and the Micro lot, which contains 1,000 currency units.

For a single standard lot, the return is ten dollars per pip: for a mini contract/lot, the profit is one dollar per pip: and for a micro lot/contract, the return is ten cents per pip. Therefore, in the earlier scenario where the currency pair increased by fifty pips, if a trader was operating with one standard contract/lot, their resulting profit would be calculated as ten dollars multiplied by fifty pips, totaling five hundred dollars.

What is Leverage?

Because not a lot of the online 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 start with little amount of 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 & known 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/contracts.

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 opened 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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