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Trading 101: Forex Trading Terminology
If you have just begun your trading journey, you may
be overwhelmed by the amount of information and
terminology that circulates through the Forex Market.
Trading is like navigating an ocean. If you don't know
all the basic knowledge that will let you operate your ship
to its optimal performance, you have no chance of making
it through the waves, storms and hurricanes that you will
This is why, today, we will answer questions about
Forex trading terminology, as well as give you a little
bonus at the end to help you get your risk management
strategy up on its feet.
What are Forex Quotes and how to read them?
A Forex quote always includes a currency pair, like
EUR/USD, NZD/JPY or AUD/GBP. The reason behind
this particular structure is explained in detail in our
article about how buying and selling works in Forex.
So, we say that a currency is quoted to another
currency. And for every pair we have:
The Base currency: It has a value of 1. It is the
reference for the exchange rate.
The Counter / Quote currency: When you're buying
the base currency, the exchange rate tells you how much
you need to pay in the counter currency.
For example, if the exchange rate for the pair
EUR/USD is 1.17730, then for every euro, you need to pay
1.17730 USD. The EUR being the base and the USD being
Spreads: What are bid and ask prices?
In the majority of cases, brokers will quote their
prices in the form of a spread. Which means that there will
be two prices for each currency pair: The bid and the ask.
The ask price is how much you're willing to give to
buy into the currency pair.
Conversely, the bid is how much you're selling the
To put it simply: you buy with the ask price, and you
sell with the bid price.
This is why, usually, the ask price is greater than the
bid. So that the broker could make a profit for the
transactions you make.
The difference between the bid and the ask is what's
called a spread.
Spread = BID – ASK
For the EUR/USD:
Ask = 1.7781
Bid = 1.7772
Which means that: Spread = 1.7781 - 1.7772 = 9 pips
What is a "lot" in Forex?
The entirety of the Forex Market is run electronically.
In fact, it doesn't even have a physical location. It all
happens within the interbank network.
Its size is estimated to be over $5 trillion.
It would be virtually impossible to trade small
amounts of money.
This is why trading comes in lots. These lots are
composed of a certain number of currency units.
They also come in 3 different sizes:
• Standard lots = 100,000 units.
• Mini lots = 10,000 units.
• Micro lots = 1,000 units.
What is Margin trading and leverage?
Now that we have learned that the minimum amount
of money that you can use in the Forex Market is at least
$1,000, is it possible for anyone to trade with less than
Yes, with the power of LEVERAGE.
For example, if you want to make a trade with 1
standard lot ($100,000), you wouldn't need the whole
amount to accomplish that trade. You only need a small
amount that you can deposit as a margin.
Leverage is represented with a ratio. If we say that for
your account you have a leverage of 1:50, what that means
is that you will need $2,000 to be able to trade with
$2,000 x 50 = $100,000
So, what all of this boils down to is that trading with
margin allows you to open large positions with a small
amount of money.
What is a pip in Forex?
Pip is short for "Percentage in Point". It's the smallest
price movement that a currency pair can make.
Calculating the pip value is crucial to determining
your position size in relation to your risk management. It
helps you identify how much exactly does every price
move cost you or benefit you.
Here's how you can calculate the pip value:
Let's take for example the currency pair CHF/JPY at
an exchange rate of 111.319.
First start by calculating your risk:
Risk = Capital x Risk%
Then determine how many pips are in your Stop
Loss. There are many ways to go about it, depending on
your approach to trading. For now, let’s just say that your
stop loss reflects the average movement of the price over
a certain period of time.
After that, you can calculate your pip value easily:
Pip = Risk / Stop Loss
You can even take this a step further and deduce the
volume of your trade to be in parallel with your risk
management strategy, by calculating the lot size:
Lot size = (the exchange rate x pip value)/(0.001 x
If you liked reading about Forex terminology, you
may also be interested in learning about other topics that
belong to the Trading 101 series.
Here at Financial Market Junky, we love discussing
controversial topics. Have a look and tells us your
Is Trading for A Living possible?
Fundamental Analysis in Forex trading: Does It Work?