Forex Trading Basics

Basic trading terms explain all details you need to know to open a trade and trade Forex currency pairs.

In this Forex guide you will learn about the Pip, spread, leverage, margin which are crucial parts to understand trading Forex.

Then you will learn about Forex order types so you know which order to open at which time. And first of all you need to learn how to open a trade generally in a trading platform.

Forex trading basics include terms that any beginner needs 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 Forex 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 are 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 in Metatrader 4. 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 money is through fixed fees or through spread. If the broker does not make money he will need to close his job.

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 order 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.

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.

You can also learn more about what are the best leverage in Forex trading so you can select the best one at the start. Basic knowledge about how to pick good leverage and not the highest one or the lowest one in really important.

What are Forex Basics About Margin in Forex

The margin is the 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:

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. 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.

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 Trading Basics About Pip Range

Reading about the Pip you will see that currency pairs move a certain amount of pips per day. That range in a day or any other time frame is called pip range.

So, the difference between the start of the time you are watching the pair and the end of that time frame is called pip range. That can be range of 20 pips or any other amount.

But for you it is important to know what the average daily range in pips is. With average pip range you can make calculations on how many pips you can expect to get on a certain pair in a certain time frame.

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:

Volatility in Forex

When the price of the currency pair is changing throughout the day it can change in one second or it can change once a while. There are different reasons why the price change and I will not get into the fundamental part what is causing price to change but I will explain what means when the price change.

Every change in the price is the opportunity for you make money. While Forex is the market on which you can make money by buying or selling currency pairs you need change in the price if you want to make money.

Above I have explained that change in the price is a Pip. Smallest change in the price can give you $1, $10 or $100 so it is important that you have change in the price often as it is possible.

When the price of the currency pair do not change you cannot make money on the Forex. Frequency of price change in the Forex is called Volatility.

Volatility in Forex is how often does the price of the currency pair changes in one period of time. For example, how often does the price change in 1 minute time frame.

If the price changes 50 times in one minute we can say that the currency price is volatile. When the currency pair is volatile it means you can expect that you can make money with buying or selling.

Volatility in Forex also means that there are many traders in the market. The reason is frequently change in the price which means many traders are selling and buying the currency pair.

Volatility is one of the biggest reasons why it is so attractive to many participants. You can expect when you enter into the trade you will be able to get out in any time because there will be trader ready to trade.

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 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 Forex will help you become successful.