forex

Forex Tutorial: What is Forex Trading?

A pip is a base unit of progress in the price assessment of currency pairs. At the point when the bid price for EUR/USD pair goes from 1.1234 to 1.1235, that is a one pip change.

Pips are a straightforward concept to understand. But in order to make significant gains, much depends on trading volume. Trading volume is the size of a trading position available, measured in units known as lots. A standard lot refers to a 100k unit trade; a mini lot refers to a 10k unit trade; while a micro lot refers to a 1k unit trade.

Spread is the difference between a currency pair’s bid and ask price. As you have read before, a currency quote has two costs – the bid price and the ask price. The ask price is constantly higher than the bid price. Spread is what causes trades to start in a slight negative P&L.

Spreads also come in two kinds – fixed or, as they are with most contemporary brokers, floating. A floating spread is a more accurate reflection of what actually happens on the market. Prices float because the currency is liquid. Supply and demand change.

Margin, in the simplest terms, is the actual money in a trader’s account. However, an average retail Forex trader simply lacks the margin to be trading Forex with enough trading volume. This is where leverage, if applied cautiously and properly, can be helpful.

Leverage is essentially capital provided by a Forex broker to bolster their client’s trading volume. For example, a trader could use a 1:10 rate of leverage to place $10,000, despite only having $1,000 in their trading account. If their trade is successful, leverage maximises that trader’s profits by a factor of 10. However, please note that leverage comes with a risk warning, as it can also amplify losses if the market moves against a taken position. In some cases, should the margin in a trader’s account run too low to maintain an open position safely, a broker can action a margin call and liquidate it with a loss – effectively wiping out all capital in a trader’s account.

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