Introduction To Forex

Get the basic knowledge of forex and start trading

Understand Forex Currency Pairs

One currency pair consists of two currencies used in the forex trading market.
The worth of one currency in the currency pair is calculated by its comparison to another currency.
Consider the example of the EUR/USD currency pair in which Euro and dollar currencies are involved.

Base Currency

The first currency that appears in a forex pair and can be bought or sold in exchange for the quote currency.
It will cost 1.25551 USD to buy 1 EUR. Alternatively, a trader could sell 1 EUR for 1.25537 USD

Quote Currency

It is the second currency that appears in a forex pair - also known as ‘counter’ currency.

Bid Price

Bid is the highest price that a trader is willing to sell the forex pair at any given time.

Ask Price

Ask is the price value at which a trader can buy the base currency.

Spread

The difference between bid and ask price of a currency pair is called spread.
For example, we are buying EUR/USD at 1.25551 and selling at 1.25537
1.25551 – 1.25537 = 0.00016 (Spread) or 1.6 (pips)

Pip

The point in percentage (pip) is a minor measurement of change in a currency pair.
It is a standard unit to explain how much an exchange rate has changed in value.

How to calculate Pip Value

Pip Calculation for the USD Account


USD is involved in the major currency pairs. In most of the currency pairs, the USD is listed as the second currency. The pip value is fixed, when you have a USD account and the USD is listed as the second currency in a currency pair. Take a look at the fixed pip amount:

$10 for a standard lot which is 100,000 worth of currency.
$1 for a mini lot.
$0.10 for a micro lot.

If USD is listed as first currency in a currency pair, then we will divide the pip values above by the USD/XYZ exchange rate. For instance, the USD/CAD exchange rate is 1.25 then, Pip value=10/1.25=$8.

Pip Calculation for a Non-USD Account


The pip values are fixed if the currency of your account is listed second in a pair.

For instance, you have an account in CAD. The pip value will be fixed for any pair like EUR/CAD.

Consider an example for in-depth understanding, if you have a Canadian dollar (CAD) account, any pair that is XXX/CAD will have a fixed pip value. A standard lot is CAD $10, a mini lot is CAD $1, and a micro lot is CAD $0.10.

When the CAD is listed and you want to calculate the value of a pip, divide the fixed pip rate by the exchange rate. Consider an example, to find the value of a mini lot, if the CAD/CHF exchange rate is 0.7820, a pip is worth CAD$1.27.

UNDERSTANDING OF FOREX CHARTS

CANDLESTICK CHART

The combination of line chart and bar chart is called candlestick chart which indicates high, low, open and close. You can change the timeframe of candles according to your specific needs.

A candlestick contains a wide part which is used to represent the open and close price of a day is called the “real body”. If the close price of a day is lower than open price then it is represented by a filled or red real body candlestick. In case if the close price is higher than the open price, than it will be represented by empty or green real body candlestick.

BAR CHART

The bar chart is used for the graphical representation of prices in the financial market. At a given time period it shows the highest price, lowest price, open and close price. The small horizontal line on the left side of a big vertical line indicates the open price, the small horizontal line on the right side of the big vertical line indicates a close price.

The topmost reach of the vertical line indicates the highest price and the bottommost reach of the vertical line indicates the lowest price in the market.

LINE CHART

The line chart is the simplest chart to show the current situation of the market. It shows the line from one closing price to the next closing price.

There are two axes perpendicular to one another known as the x-axis and y-axis. The horizontal axis shows the time and vertical represents the price. Mostly, line chart is used to understand day-to-day price changes but it can be used for any timeframe. Expert traders can build more accurate support and resistance levels using this easiest forex chart.

FOREX IMPORTANT TERMS & Definitions

Forex

The term “FOREX” is used for Foreign Exchange (also known as FX) which is an online global network used to buy and sell currencies with a daily turnover of $5.1 trillion. It provides the facility to trade 24 hours a day and 5 days a week where banks, individual traders, financial institutions and companies can participate.

The person or organization that mediates by bringing the buyer and seller together.

It is a transaction that aims to take advantage of the price difference between financial instruments in different markets. It is purchased from the low-price market and sold in the market where the price is higher.

Each currency is identified by a 3-letter code. EUR, USD, JPY (Japanese Yen), CHF (Swiss franc), GBP (British pound or sterling), AUD (Australian dollar) and CAD (Canadian dollar) are the main currencies.

Markets where purchases are strong and prices gain value rapidly.

Markets where sales are strong and prices are rapidly depreciating.

It is the money in our account. Our balance does not change when we open a position. However, when we close an open position, profit and loss is reflected in our balance.

This is the purchase order given when the price is lower than the current market price. Investors give this order; the price falls to their desired level and they think that the price will rise again after the order is realized.

It is used to enter a purchase price at a price higher than the price currently traded in the market. At first glance, buying at a higher price than the current price seems contradictory; the buy stop order is used with the idea that the market will go further up if a specified resistance point is broken.

Contract for Difference (CFD) is derivative instruments that enable the purchase and sale of price expectations only without actually having assets such as stocks, indices or commodities.

The name was given to the level at which prices will be forced to pass in a descending price chart.

It is the name given to the level at which prices will be forced to pass in a rising price chart.

This is the type of order used to trade at a price different from the prices that are actively traded in the market.

This is the amount of money your brokerage has blocked to keep your current position open. You cannot use this balance without closing your current position.

Statistical data showing the course of the economy such as inflation rate, unemployment level, house sales.

A timed calendar showing the time and status of important economic indicators and events.

It is the name given to the group of products that are traded in the markets and belong to the commodity group. Oil, sugar and many other raw material groups are traded in commodity markets.

Hedging

Opening positions in different directions using the same currency pair is called hedging. For example, if we have 10 long positions in EURUSD parity, if we take 10 short positions in EURUSD parity without closing our position, we will do hedging. In this way, the margin is zero for our two equal positions.

The transaction request that you forward to your brokerage house to be operated on immediately or later in the market.

A term used for transactions outside the stock exchange.

An agreement entered into by the investor without any payment. The investor expects a profit but also carries a risk.

Recently, 5 digits are used in currency pairs and the point is used as the smallest unit. Point is one-tenth of pip value. In EURUSD pair, the fifth digit at 1.30568 pricing is the point value and is equal to 0.1 pips. The point value is 1 USD in EURUSD pair.

The price at which an investor can buy any instrument (currency, commodity, etc.).

The amount required to remain in your account to cover losses that may occur in your investments is called free collateral or usable collateral.

Name given to technical indicators and used to forecast price changes on the currency market.

These are the orders that enable the position to be closed automatically when the market price reaches that level by entering a price level above the current price in open buy transactions and by entering a price level below the current price in open sale transactions.

The price conversion rate of a currency priced in the market is called quotation. The EUR / USD, USD / JPY and the GBP / USD currency pairs represent a quotation.

Automated orders to buy at a lower price than the current market price or to sell at a higher price.

It is the purchase of the base currency (primary currency) in a currency pair and selling the quoted currency (secondary currency). For example, when a long position is opened in EURUSD, Euro is bought and USD is sold.

The faster an instrument is converted to cash, the higher its liquidity. In forex markets, liquidity is very high since the markets can be easily converted to cash even when closed.

LOT is used as a trading unit in Forex markets. The standard lot size on the market is 100,000 units. 100,000 units are often abbreviated to 100K. Under 1 lot, 10,000 units (10K or 0.1 lot) can be traded as a mini lot.

Indicates how many units have your transaction. They are classified as micro, mini and standard lot according to their quantity.

The price at which the current situation is agreed to be sold.
Sample:

1.30000 x 100.000 / 100 = 1.300 USD margin is required.

In the example, the leverage is considered to be 1: 100 and the processing amount is 1 lot. The standard lot size in EURUSD parity is 100,000 units.

The organizations authorized to offer and trade prices. They are intermediary institutions that try to regulate the stability and liquidity in the market of financial assets by giving continuous buying and selling quotations.

Sell Stop

Used to enter a selling price at a price lower than the price currently traded on the market. At first glance, selling at a lower price than the current price, as in the buy stop order contrary to the perception; the sell stop order is used with the idea that the market will go further down if a designated support point is broken.

A purchase or sale transaction at the current price in the market. When this type of order is executed, buy or sell transaction is executed instantly from quotations that are actively displayed on the screen.

In contrast to the devaluation, the appreciation of a currency relative to other countries' currencies.

The price at which a trader selling any instrument (currency, commodity, etc.) can sell this instrument.

The price limit for the automatic closing of the position of the investor in order to keep the amount of loss to a minimum.

In a currency pair, the base currency (primary currency) is sold and the quoted currency (secondary currency) is taken. For example, when a short position is opened in EURUSD parity, Euro is sold and USD is taken.

It is a trading method used in Forex markets and aims to make a profit from small price movements. In the market, instant transactions for making profits below 10 pips are considered as scalping.

It is called the sales order given when the price is higher than the current market price. Investors give this order; they think that the price will go up to their desired level and the price will fall again after the order is realized.

The amount of unblocked money that exceeds the required collateral held due to open positions in your account.

A remarkable change in price in a short time. It is usually seen after data descriptions.

If the total asset in the account decreases to 50% of the required collaterals, the system automatically closes the positions starting from the position with the most loss until it moves the positions back to 50%.

If an investor trades by using the entire margin, it falls below the minimum margin required to maintain his position. In this case, the brokerage firm calls the investor to complete this margin.

It is special software used for trading in the Forex Market.

When you buy in a pair (currency pair), you are in the “long-long” position.

The sum of the required collateral, free collateral and instant profits and losses of open positions.

Volatility. The higher the price of the pair, the more it plays, and the more opportunities for investors.