Introduction :-

The Forex market contains many complex terms, so traders need to understand the basic terminology. Therefore, let’s take a look in this article at how to understand these terms and how they are applied in practical reality.

The article will cover the following points : -

1: Information about forex

2: Pips

3: Lot

4: Leverage

5: Spread

6: Ask and Bid prices

1: Information about forex :-

·        High liquidity:

Forex market is the largest financial market in the world, with daily trading volume reaching 7 trillion US dollars. This means that the trading volume in the Forex market is more than three times the trading volume in the global stock market. This is due to the participation of central banks, major financial institutions, as well as large investment portfolios and funds, making the foreign exchange market the largest and most stable financial market.

·        Work throughout the day:

The Forex market operates 24 hours a day, continuously, for five days a week, except for Saturdays and Sundays. It brings together four regional markets: the Australian, Asian, European, and American markets.

2: Pips :-

A pip is the smallest possible change in the price of a currency and is used to measure price movement. You can calculate pips using some online tools available for most currency pairs. In most cases, a pip represents a change of 0.0001 in the currency price.

There are exceptions, such as currency pairs involving the Japanese yen, where a pip represents a change of 0.01.

Here’s a simple example of pips: Let’s say you are trading the EUR/USD pair (EUR/USD). If the price of the pair starts at 1.1000 and then rises to 1.1005, the price has moved by 5 pips. Since a pip represents a change in the fourth decimal place (0.0001) in most pairs, the change here equals 5 pips.

Simply:

If the price rises by 5 pips, it means the value of the Euro has increased relative to the US Dollar.

If the price falls by the same amount (from 1.1000 to 1.0995), it means the value of the Euro has decreased relative to the Dollar.

3: Lot :-

A lot is a term used in the Forex market to refer to the size of a trade or the quantity being traded. Lots are determined based on the size of the contract being traded, with each lot representing a specific amount of currency.

Types of lots in forex:

·        Standard lot

A standard lot equals 100,000 units of the base currency.

Example for a standard lot:

If you're trading the EUR/USD, buying a standard lot means you're buying 100,000 Euros.

·        Mini lot

A standard lot equals 10,000 units of the base currency.

Example for a Mini lot:

If you're trading the EUR/USD, buying a standard lot means you're buying 10,000 Euros.

·        Micro lot

A standard lot equals 1,000 units of the base currency.

Example for a Micro lot:

If you're trading the EUR/USD, buying a standard lot means you're buying 1,000 Euros.

How to Calculate the Lot Size and Integrate it with Pips :-

To calculate profit or loss based on the number of points (pips) you expect in a Forex trade, you need to know the lot size you're trading. Let’s take an example:

Assume you open a buy position in the EUR/USD pair, and based on your analysis, you expect a profit of 10 pips. In this case, you need to determine your lot size to calculate the expected profit.

If you set the lot size using the following methods, you’ll know how much your profit would be:

·        Lot size of 0.01: Each pip is worth 10 cents. So, if you gain 10 pips, your profit would be $1.

·        Lot size of 0.1: Each pip is worth $1. So, if you gain 10 pips, your profit would be $10.

·        Lot size of 1.00: Each pip is worth $10. So, if you gain 10 pips, your profit would be $100.

4: Leverage :-

Leverage is the ability to trade with a larger amount than what is deposited in your account.

Let’s say you want to buy a car worth $1,000, but you only have $100 in your wallet. In this case, your friend or a bank could lend you $900 to help you purchase the car. You would later repay this amount. In this scenario, your friend has provided you with leverage at a ratio of 1:10, where you used your own $100 and borrowed $900. This is similar to how leverage works in certain Forex companies.

In the Forex market, if you want to trade with $100 with leverage, for example, at a ratio of 1:10, you can open a position of $1,000. However, if the trade moves against you, you would only lose your $100.

5: Spread :-

The spread in the Forex market is the difference between the bid price (selling price) and the ask price (buying price) of a currency pair. In other words, it’s the difference between the highest price you can sell at (bid) and the lowest price you can buy at (ask) at any given moment.

Example of the Spread: Suppose the bid price for the EUR/USD pair is 1.1200, and the ask price is 1.1202. The spread here is 2 pips (or 0.0002).

How does the spread affect trading?

The spread represents an additional cost when entering and exiting a trade. If you're in a buy position, you start at a loss equivalent to the spread because the price must move in your favor to cover the spread first.

Typically, the spread is small for major pairs like EUR/USD, but it can be larger for less liquid pairs.

Types of spreads:

·        Fixed Spread: The spread does not change regardless of market conditions.

·        Variable Spread: The spread changes based on market variables. In times of high volatility, the spread may widen.

6: Ask and Bid prices :-

·        Ask Price:

This is the price the broker offers to traders if they want to buy a currency pair. It will pay to purchase the currency.

·        Bid Price:

This is the price the broker offers to traders if they want to sell a currency pair. It will receive if you wish to sell the currency.

Conclusion : -

Forex terms are essential for understanding and analyzing currency markets, helping traders make informed decisions and achieve success in trading. Therefore, traders should delve into these terms before starting in the Forex market.