Understanding basic Forex concepts is crucial for every beginner. These foundational terms will give you a clear overview of the essential aspects of the Forex market. Consider this your “first lesson” — knowing these terms helps you avoid common mistakes caused by basic misunderstandings.
In this article, we will cover:
- Concept of Forex (already explained in What Is Forex? Why It Is One of the Hardest Professions)
- Characteristics of Forex
- Market participants
- Major and cross currency pairs
- Spread
- Pip (smallest price movement unit)
- Entry points, Take Profit, and Stop Loss
- Market orders, Limit orders, and Stop orders
- Forex trading session schedule
Characteristics of Forex
- No geographical boundaries: Forex is a global market with no centralized physical location. Anyone with an internet connection can participate in the market.
- High liquidity and fast execution: During trading hours, you can buy or sell currencies instantly, as there is always someone ready to take the opposite side.
- A 24-hour market: Forex operates continuously 24 hours a day, 5 days a week, closing only on weekends and major holidays.
Market Participants
Participants in the Forex market include:
- Central banks of countries or unions of countries
- U.S. Federal Reserve (FED)
- Investment funds
- Commercial banks
- Forex brokers
- Individual traders (like you and me)
Major and Cross Currency Pairs
- Major currency pairs: EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CAD, NZD/USD, USD/CHF. These pairs are the most traded and have the highest liquidity.
- Cross currency pairs: Currency pairs that do not include USD, such as EUR/GBP, EUR/JPY, GBP/JPY, AUD/CAD, etc. They are traded less frequently but still have significant volume.
- In total, there are 28 commonly traded Forex pairs including majors and crosses.
Spread
- The spread is the difference between the bid and ask price at a given moment. The unit is measured in pips, the smallest price movement.
- Example: EUR/USD was quoted 1.1924 / 1.1925. The spread = 1 pip. Buying at 1.1925 and selling immediately at 1.1924 results in a 1-pip loss.
- Low spreads reduce trading costs. Major brokers for tight spreads include FxPro, IC Markets, FXCM, Tickmill, Forex.com, Dukascopy, and Pepperstone.
Pip – The Smallest Price Unit
- Pip stands for “Percentage in Point” – the smallest unit of currency movement.
- Some brokers quote an extra decimal for more precision (fractional pips). For example, EUR/USD 1.19243 / 1.19256 → spread = 1.3 pips. Knowing pips helps calculate potential profit or loss for each trade.
Entry Points, Take Profit, and Stop Loss
- Entry point: The price at which your trade is opened.
- Take Profit (TP): The price at which your trade is closed to secure profit.
- Stop Loss (SL): The price at which your trade is closed to limit loss.
- Trades can be opened or closed manually at market price, or automatically via pending orders.
Market Orders, Limit Orders, and Stop Orders
- Market orders: Executed immediately at current price. Example: Buying EUR/USD at 1.19256 or selling at 1.19243.
Limit orders: Executed automatically at a pre-set price:
- Buy Limit: Buy if price drops to your target. Example: EUR/USD 1.19243 → Buy Limit at 1.19143.
- Sell Limit: Sell if price rises to your target. Example: Sell Limit at 1.19343.
- Stop orders: Executed automatically when price reaches a certain level:
- Buy Stop: Buy if price rises above your target. Example: Buy Stop at 1.19443.
- Sell Stop: Sell if price drops below your target. Example: Sell Stop at 1.19043.
Forex Trading Sessions
- To check which session is currently active or the daily trading schedule, you can view it easily here.
Next Steps
This article covers the basic concepts in Forex. In upcoming posts, we will dive into:
-
Popular trading platforms such as MetaTrader 4 (MT4).
-
Technical Analysis – the core approach I use to trade Forex (why choose Technical Analysis: Why Choose Technical Analysis?).
Best regards,
CaPhiLe.Com
No comments:
Post a Comment