2.1 Bid and ask prices
In the Forex market, currencies are quoted with two prices: the bid and the ask price. The bid price is the highest price at which a trader can sell a currency pair, while the ask price is the lowest price at which a trader can buy the same currency pair. The difference between the bid and the ask price is called the spread, which represents the cost of trading.
2.2 Pips and points
A pip is the smallest price movement in the Forex market, typically equal to 0.0001 for most currency pairs. Some currency pairs, like those involving the Japanese yen, are quoted in two decimal places, making one pip equal to 0.01. A point represents a larger price movement, usually 10 pips, and is often used to describe significant price levels or targets.
2.3 Lots and leverage
A lot is the standard unit size of a Forex trade. There are three main types of lots:
- Standard lot: 100,000 units of the base currency
- Mini lot: 10,000 units of the base currency
- Micro lot: 1,000 units of the base currency
Leverage allows traders to control a larger position with a smaller amount of capital. For example, with a 50:1 leverage, a trader can control a $100,000 position with only $2,000 of their own capital. While leverage can amplify profits, it can also amplify losses, making it essential to use proper risk management.
2.4 Margin and margin calls
Margin is the amount of capital required to open and maintain a leveraged position. It is expressed as a percentage of the total position size. A margin call occurs when the equity in a trading account falls below the margin requirement. In this situation, the broker may close some or all open positions to prevent further losses or require the trader to deposit additional funds.
2.5 Order types
Different order types are used to enter and exit trades in the Forex market. Some common order types include:
- Market order: An order to buy or sell a currency pair at the current market price. This order type is executed immediately.
- Limit order: An order to buy or sell a currency pair at a specific price or better. This order type is used to enter or exit a trade at a more favorable price than the current market price.
- Stop order: An order to buy or sell a currency pair when the market reaches a specified price. This order type is used to enter a trade in the direction of the market or to protect an open position with a stop-loss order.
- Trailing stop order: A stop order that moves with the market, adjusting the stop level as the market moves in the trader’s favor. This order type is used to lock in profits while allowing the position to remain open for potential further gains.
Understanding these basic concepts is crucial for trading successfully in the Forex market. As you gain more experience, you can explore more advanced strategies and techniques to improve your trading performance.