Forex Basics – Tutorial for Beginners

by Sep 3, 2020What Is Forex

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Forex basics include terms that any beginner need to know if he wants to know how to be part of the Forex. It is mandatory that you know basic terms because without knowing them you will not understand other area in Forex.

As in all part of our lives if you want to know something you need to know the basics and logic behind in order to maximize the return from it.

If you do not know how to fish you will not know where the best fish is and you will be hungry. If you know how to fish then you have the basics to catch the fish and not being hungry.

This article will cover Forex basics which you will use in trading through trading platform. Explained basics will give you the basis for future advancement in Forex.

What are Forex Basics For Beginners

Forex basics are the terms you will use each time when you want to participate on the Forex. Will that be through trading platform or through reading articles and news, each one of them will require that you understand them.

Most basics terms I will cover here the terms that are used in trading because Forex is about making money. If you want to make money with Forex trading platform you need to know these things.

In order to understand how to make money you need to know what are your costs. You need to pay some money each time you enter into Forex trading.

Each order you open in Forex have some costs. That cost is payed to the broker who offers you service of accessing to Forex market.

Other Forex basics are covering what you need to know when you want to open order. If you make a wrong decision when opening an order you can end up losing a lot of money.

Each order you open have settings you need to fill before opening them. Those settings include details how much each pip will cost. At which price you will open an order when you buy or sell currency pair?

What is basic leverage you should use in Forex and how much margin you need to have?

Now, let’s explain each Forex basic term I have listed above so you get familiar with them and get the best out of them.

Forex Spread Basics For Beginners

Broker need to make some money in order to stay liquid and the way he makes the moeny is through fixed fees or through spread. If the broker does not make money he will need to close.

There are two ways how he can make money from you.

Fixed Costs or Fees

First way is to charge you one fixed amount each time you open an order. Will that be buy or sell order you will need to pay some amount that he defines.

The costs he charges are always presented before opening an account. That way you will not end up with costs that are unfamiliar to you.

Those costs depends on the amount you will trade. If you trade 1 standard lot you will pay one amount. If you trade 10 standard lots you will pay more.

I will not get into details here how much broker charge per each trade because each broker have its own costs. To find the costs you would pay, it is best to check with your broker.

Pip spread calculation

Spread Costs

Second way how the broker can charge you his costs is through spread. Spread is the difference between BID and ASK price on the trading platform.

Bid and Ask price are two prices and each price represents the price at which you will buy or sell currency pair.

Difference between bid and ask is the spread and it is the cost you will pay. The spread can be fixed or it can fluctuate. That means your costs can be fixed on each trade or the costs can fluctuate.

More information about Forex spread basics you can read in the article about what is spread in Forex.

What are Basics About Leverage in Forex

Leverage in Forex means borrowed money from the broker. It is virtual money that allows you to trade higher volumes on each trade.

The leverage always exceeds the amount you have on your trading account. Meaning, if you have $1,000 on your account you will borrow at least several times more than that amount(1:2, 1:3 or more).

The Leverage in Forex is a tool that trader can use to increase the value of a pip and to increase the profit or loss on each trade.

Well, the loss should be avoided because you want to make money trading Forex.

Forex broker offers many leverages and one of the typical ones are leverage 1:100. The ratio 1:100 means you will borrow $100,000 from the broker if you have $1,000 on you account.

Each broker can have certain rules for each leverage. For example broker can request that you have $1,000 for leverage 1:100. For amount of $500 you can have leverage 1:400.

If you want to learn more about leverage I suggest you read article about what is leverage in Forex and get more information about logic behind the leverage in Forex.

What are Forex Basics About Margin in Forex

The margin amount broker use to open the trade on the Interbank market. He does not use only your margin but also margin from other traders and with large margin he puts the trades on the Interbank market.

In order to open leveraged trade where you control more money than you have invested on your account, you need to have margin.

The broker use the margin when you open a trade. The amount the broker use as a collateral depends on the trade size. When you increase your trade size or open more trades at the same time, the margin amount increases.

Typical margin requirements and the corresponding leverage are listed below:

MARGIN REQUIRED MAXIMUM LEVERAGE
5.0% 1:2
3.33% 1:30
2.0% 1:50
0.5% 1:200

 

How to calculate margin, why you need margin, what is margin level you can find in the article what is Margin in Forex.

Another topic you need to know is what is Free Margin and what is Margin Call in Forex.

Those are the articles that will help any beginner in Forex to understand this very important area in trading.

What are Basics About Bid and Ask Price in Forex

What basic knowledge about Bid and Ask price beginner needs to know is that it is the price someone is willing to pay for it and the price someone is willing to sell to you.

Bid Price in Forex

When you want to make a trade and decide to sell a trading pair you will take a look into the chart. The price you will see will have two lines.

One line will indicate Bid price and it will be the price you will open the SELL order if you want to sell the pair. It will be on the price 1.30690.

As soon you open the trader you will be in minus for the difference between Bid and Ask price. That difference is called spread I have covered earlier in this article.

Ask Price in Forex

When you want to make a trade and decide to buy the pair, you will pay the price indicated with Ask line.

When you open the trade you will open the trade at 1.30760 and you will be in minus for the difference between Bid and Ask price

When you get around and start testing on the trading platform you will quickly get around basics on Bid and Ask price in Forex.

What are Forex Basics About Pip

Basics about a Pip in Forex consist of knowledge about what is a pip, definition of a pip, how to calculate a pip and other things.

Pip is the term used very often in Forex market. Knowledge about the pip will help you to understand trading strategies and to calculate values of a pip.

Meaning of a pip in Forex is about price that moves up or down. The change of the price is expressed with the small unit that is called a Pip.

Pip definition say that the term “pip” is from Percentage-In-Point or Price Interest Point. Which ever pip definition is correct we will use the name Pip because it is most used term in the Forex trading.

Meaning of a pip is smallest change in the price of a currency in Forex trading. If you see that a currency changes the value by 1 cent(example U.S. dollar), in Forex trading the change will be defined by the pip which is 100 times less than a cent.

The example below shows the price of the trading pair, which is 1.28416. The price have 5 decimal places which means that the last value is pipette.

Last number at the end represents number of pipettes and the number on the 4th decimal place is the pip.

The pip contains 10 pipettes. So, the below image shows me 1.6 pips which means I have 1 pip and 6 pipettes.

Pip-and-Pipette

If you want to know more about a pip you can read the article about what is a pip in Forex.

There you will find a lot more basics about pip in Forex that will clear things about pip. Basics like how to calculate a pip, examples of a pip in Metatrader 4, calculate a pip for USD trading pairs and in other currencies.

What are Forex Basics About Lot Size

Lot size in Forex defines how much a pip will be worth.

How much is lot in Forex is defined by the contract size.

The contract size in the Forex is defined like this:

Lot size Units of
base currency
Volume Pip value in USD
1 standard lot 100,000 1.00 1 pip=$10
1 mini lot 10,000 0.10 1 pip=$1.00
1 micro lot 1,000 0.01 1 pip=$0.10
1 nano lot 100 0.001 1 pip=$0.01

 

Lot size will define how much you will earn if the trading pair price changes by 1 pip. By increasing the lot size, value of 1 pip will worth more and if you lower lot size the value of 1 pip will worth less.

The typical lot size in Forex is between 0.01 Lot  and 1.00 Lot. This means between micro and standard lot size.

If you want to see real examples how the lot size is calculated and how the lot size have impact on the pip value you should read article about what is lot size in Forex.

Conclusion

Forex basics defines the most basic terms you need to know if you want to be in Forex. Without knowing them you will not succeed with trading.

This article have listed all what you need to know and how those basics defines some parts of trading.

Knowing what is spread you will know how much you will pay to the broker each time you open a trade.

When you open a trade you need will know how much margin you will have as a free margin. When the margin call will be activated and what to watch to have enough margin.

Leverage as a great tool needs knowledge how to use it in order not to lose all you money.

And finally, smallest change in the price, a pip, is crucial basic term in Forex you need to know.

The pip defines how much you will make money on each trade and where to set profit target as well where to set targets so you do not lose all money.

Keep reading and learning that will help you become better and better. Knowing more about trading will help you become successful.

Frano Grgić

Frano Grgić

A Forex trader since 2009. I like to share my knowledge and I like to analyze the markets. My goal is to have a website which will be the first choice for traders and beginners.

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