Forex Basics Every Beginners Must Know!What is forex?
Forex (Foreign Exchange) is the global market where people buy and sell different currencies to make a profit. It is the largest financial market in the world, where currencies from different countries are traded with each other.
Every Forex trade involves two currencies.
For example: EUR/USD, USD/INR, GBPJPY, USD/ZAR, etc.
But why?
You are buying one currency and paying in the second currency.
In EUR/USD, you are buying EUR and paying with USD. In other words, EUR/USD shows how many US dollars are needed to buy 1 Euro.
Forex pairs show how much of one currency is needed to buy another currency.
Base Currency & Quote currency:
1. Base Currency:
The first currency in the pair is called the base currency. It is the currency you are buying or selling.
2. Quote Currency:
The second currency in the pair is called the quote currency. It shows how much of that currency is needed to buy one unit of the base currency.
Q: What if I am selling EUR/USD?
If you sell EUR/USD, it means you are selling Euros (EUR) and buying US Dollars (USD).
It means you believe that the Euro will become weaker compared to the US Dollar.
Currency Classes in Forex
In Forex, currency pairs are generally divided into three classes based on trading volume and popularity.
1. Major Currency Pairs
Major pairs are the most traded currency pairs in the world, and they always include the US Dollar (USD).
2. Minor Currency Pairs (Cross Pairs)
Minor pairs are currency pairs that do not include the US Dollar.
3. Exotic Currency Pairs
Exotic pairs include one major currency and one currency from a developing country.
Quick Comparison:
Important Topic:
1. What is Spread?
- It is the difference between the buy price and the sell price.
Let’s take a random currency example:
Suppose,
Buy price is 1.1002, and Sell price is 1.1000
Spread = 2 pips
2. What is pip?
A pip is the smallest standard price movement in a Forex currency pair. Think of it like a unit used to measure price movement.
For Most currency pairs:
1 pip = the 4th number after the decimal
For example, the price of GBP/USD is 1.2745.
The price of GBP/USD is 1.2745.
If the price moves to 1.2746, this change is called a 1 pip move.
1.2745 to 1.2750 = 5 pip
1.2745 to 1.2760 = 15 pip
For JPY Pairs:
1 pip = 2nd decimal place is the pip
For example. The price of USD/JPY is 158.43.
If the price moves to 158.50, this change is called a 7 pip move.
What is the lot size?
In Forex trading, you don’t buy or sell just one unit of a currency, such as $1 or €1. Instead, currencies are traded in standardized amounts called lots, which represent batches or blocks of currency.
What is leverage?
Leverage in Forex trading allows traders to control a larger position with a smaller amount of money.
In simple terms, leverage means borrowing money from your broker to trade a bigger amount than what you actually have in your account.
Imagine you have $100 in your trading account. If your broker provides 1:100 leverage, it means you can open a trade that is 100 times larger than the money you actually have. So with $100, you are able to control a position worth $10,000 in the market. In other words, leverage allows you to trade a much larger amount of currency than your account balance alone would normally allow.
Common Leverage Ratios:
1:10 → $1 controls $10
1:50 → $1 controls $50
1:100 → $1 controls $100
1:500 → $1 controls $500
That’s it.
This series will continue with the upcoming parts.
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