Currency Pair
It is the quotation of one currency unit against another currency unit.
| United States Dollar | USD |
| Euro | EUR |
| Pound Sterling | GBP |
| Japanis Yen | JPY |
| Canadian Dollar | CAD |
| Swiss Franc | CHF |
| New Zealand Dollar | NZD |
| Australian Dollar | AUD |
For example, the euro and the US dollar together make up the currency pair EUR/USD. The first currency (in our case, the euro) is the base currency, and the second (the US dollar) is the quote currency.
Forex is trading in pairs, which means, each transaction involves selling a unit and buying another unit. The following pairs are the 18 most popular pairs in the Forex market.
| EUR/JPY | USD/CAD |
| EUR/CHF | EUR/USD |
| EUR/GBP | USD/CHF |
| AUD/CAD | GBP/USD |
| GBP/CHF | NZD/USD |
| GBP/JPY | AUD/USD |
| CHF/JPY | USD/JPY |
| AUD/JPY | EUR/CAD |
| AUD/NZD | EUR/AUD |
Exchange Rate and Quote
When a pair of currency units are bought and sold, it has a bid-ask rate (for example):
Pair EUR / USD
Ask 1.5422
Bid 1.5420
This means that:
Buy pairs to bid rates or sell pairs to the asking rate ( Offer )
Buy Euro at $1.5422 Or Sell Euro at $ 1.5420
So what's your potential to gain profit?
The rate of pairs is constantly changing. One way to make money is to buy a pair at a rate and then close it at a higher rate. Another way is to sell a pair and then close the position at a lower rate.
Yes, in the FOREX market we can always make money by recognizing the trend. If we are in a bullish market we buy and if the trend is bearish we sell. Do not forget that trend is your friend!
Spread
The bid is always lower than the ask. And the difference between the bid and ask is the spread.
- Fixed spread
- Variable spread
You may see different prices from different brokers. FOREX is a decentralized market. There is no central source. What you see as one price, is in fact the best price of hundreds of slightly different prices for different amounts of currency different market participants offer to buy from you or sell to you.
Account Currency
It is the currency you choose when you open a trading account with your broker.
Pip
A pip is the smallest price change of a given exchange rate.
For example: if the currency pair EUR/USD moves from 1.2150 to 1.2151, that’s a 1 pip movement.
Most currency pairs have 4 decimal points.
The JPY has 2 decimal points.
Fractional Pip
Some brokers add one decimal point to the price. We call the last decimal place a pip fraction or tenth pip.
Lot
Lot is the unit of FOREX trading. Like kg when you buy potato!
- One standard lot has 100,000 units of the base currency.
- a micro lot has 1,000 units.
Pip Value
The pip value shows how much 1 pip is worth.
An example:
Account currency: USD
Trade size 1 Standard lot
In the EUR/USD pair, 1 pip movement is .0001 USD.
0.0001x100,000=10USD with no leverage
Margin
Margin is the minimum amount of funds that you will need if you want to open a position and keep your positions open.
Leverage
Is the money your broker lends you so that you can trade bigger lots:
Equity
It is the total amount of money in your trading account, including your profit and losses.
Margin Call
Margin calls are a major part of risk management: as soon as your Equity drops to a percentage of the margin used, your forex broker will notify you that you need to deposit more money if you want to maintain your position. Different brokers have different margin level requirements.
Position
It is a trade that you have open.
Long Position
When you buy a base currency. for example, if you go long on EURUSD then you are buying EUR.
Short Position
When you sell a base currency.
Order Types
Market Order / Entry Order
To buy or sell currency instantly at the current price.
Limit Order
It is an order placed away from the current market price. This will be executed if the price reaches your target or market opens etc
Take Profit Order (TP)
Will close your position if the price hits your target.
Stop-Loss Order (SL)
Your position will be closed if the price goes against your analysis at a rate calculated by you.
Execution
It is the process of completing an order.
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