Forex Basics Concepts
Learning to trade the currency market is much easier for beginners when beginners start by learning 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?
Forex 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 make a profit. Traders will buy a currency that they think will appreciate in value & sell the currency that they think will depreciate in value.
In Forex traders buy currencies when the currencies become undervalued and sell currencies when currencies become overvalued. This is the basic concept of trading forex, as a beginner 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 opposite buying overvalued currencies because that's when these currencies seem to be moving up and up & they sell undervalued currencies because these currencies seem as if they'll continue to move lower.
Just like in stocks market successful trader buy stocks when the stocks price is low & sell stocks when the stocks price is high. This is the same concept that traders should follow when trading currencies.
What's a Currency Pair?
Forex trading is the simultaneous exchange of one currency for another, for this reason currencies are traded in pairs known as currency pairs. For example EURUSD is the forex pair which traders wanting to exchange EUROs for USA Dollars trade. In this currency pair the EURO is being traded against the US Dollar.
What's a Currency Quote?
Because currencies are traded 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 one EURO is worth in terms of USA Dollars. 1.2500 currencies quote means that 1 Euro is equivalent to 1.2500 USA dollars.
Currency quotes in Forex are quoted in the format of four decimal places.
What's a Pip?
Currency quote are quoted in the format of four 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 movement would be used to calculate the profit a trader would make if they had opened a trade at 1.2500 and closed it at 1.2600.
What's a Lot?
In currencies are traded 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 & the Micro lot which is made up of 1,000 units of currency.
For 1standard lot the profit is $10 per pip, for mini lot the profit is $1 per pip & for micro lot the profit is $0.10 per pip. Hence, in the above example where the forex pair headed upward by 50 pips if a trader was trading using one standard lot then their profit would be $10 multiplied by 50 pips which is $500.
What's Leverage?
Because not many traders can afford to trade 100,000 units of currency or 10,000 units of currency, there's leverage in Forex which means that traders can borrow money and 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 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 units of currency. This leverage is what makes accessible to retail traders because retail traders can begin with little capital of their own and use leverage to borrow the rest of funds required for trading. The money that the trader deposits is referred to as a trader's margin and one can continue borrowing money using this leverage option as long as they have the required margin in their account. This is why traders must have the required account balance in their account to open the trade transactions they want to, for example a trader using leverage 100:1 must have more than $1,000 in their account to be able to open & trade using standard lots.
What's Margin?
Margin is the specific amount of money which a trader is required to put aside in order to continue holding an open leveraged trade. Margin also can be explained as the deposit a trader is required to keep so as to maintain his open positions. This margin is a percentage of account equity that has to be set aside and allocated as a margin deposit for the open positions that are held by a currency trader.
