THEORY TO PRACTICAL
What is a pip?
The word “PIP” stands for Percentage in Point. In forex, a pip is what you would consider a “point” for calculating profits and losses.
For most currency pairs, the 'pip' location is the fourth decimal place.
For example, if the GBP/USD moved from 1.29834 to 1.29844 you would have gained or lost one pip, depending on if you're long or short. The amount that pip is worth depends on the lot size you open.
What is a lot?
A lot is a term that refers to the smallest available trade size that you can place on your account. For example, a micro lot is 1,000 units of currency, meaning the smallest trade that you can place is 1,000 units. You can place larger trades, but the trade size must be an increment of 1,000, like 2,000, 3,000 or 10,000, to name a few examples.
1000 Units of currency = 0.01 Lot (micro)
10000 Units of currency = 0.1 Lot (mini)
100000 Units of currency = 1 Lot (standard)
What Is a market order?
A market order is a buy or sell order to be executed by your forex broker immediately at current market prices.
What is a stop loss?
A stop loss is an order placed with your broker to sell trade position when it reaches a specific price. This is used to limit loss, usually when the price can not be actively monitored by the trader. Even though most traders associate stop-loss orders with a long position, it can be applied for a short position.
What is an entry order?
An Entry Order is an order to enter the market at a specified price.
Entry orders are divided into two types, Limit Entry and Stop Entry orders.
Limit Entry orders are entry orders to enter the market at a more favourable price. When buying a currency pair, the limit entry will be placed below the current market price. When placing an entry order to sell, the limit entry order will be placed above the current market price. Limit entry orders are often conducive to strategies pertaining to range-bound markets, where clients can place orders to buy at the bottom of the range and sell at the top.
Stop entry orders operate on a rationale that is the opposite of limit entry orders. Stop entry orders are orders to enter the market at a less favourable price. When buying a currency pair, the stop entry will be placed above the current market price. When placing an entry order to sell, the stop entry order will be placed below the current market price. Stop entry orders are conducive to breakout strategies, where the trader believes that if the specified rate is reached, the trend’s movement is confirmed and thus will continue in that direction.
The Main Traded Forex Currencies
The United States Dollar (USD)
The US dollar is the most traded currency in the forex market. It represents about 86% of all foreign exchange market transactions. It is also used as a measurement tool to evaluate other currencies and commodities.
The dollar dominates the foreign exchange reserves held by all countries - representing about 64% of world reserves.
The Euro (EUR):
The euro is by far the latest currency on the forex market. The euro is used by the European Union's member countries. It is the second most traded currency, representing around 37% of forex transactions.
The Japanese Yen (JPY):
The Japanese yen is the strongest - and by far the most traded currency - in the Asian market. The yen is the third most traded currency, mainly in exchange for dollars and euros - it represents 20% of the world's exchanges.
The British Pound (GBP):
The British pound is the UK's currency. The GBP is the most traded currency against the USD and EUR, and the fourth internationally, representing 17% of trading. 34% of forex transactions pass through London's "City", which is the currency market's main financial centre.
The Swiss Franc (CHF):
Switzerland's strong international trade and inflows of money make the Swiss franc one of the major currencies traded on the forex market.
The Canadian Dollar (CAD):
The Canadian economy is export-oriented and is considered to be a "commodity currency". The main export is crude oil, so the Canadian dollar is therefore influenced by the price of crude.
Major Forex Currency Pairs
The exchange rate describes the price for which the currency of a country can be exchanged for another country's currency hence forex trading is done by trading currencies in pairs.
The most popular currency pairs, also known as "the majors" are:
EUR/USD (euro/dollar) – "euro"
USD/JPY (U.S. dollar/Japanese yen) – "gopher"
GBP/USD (British pound/dollar) - "cable"
USD/CHF (U.S. dollar/Swiss franc) – "swissie"
AUD/USD (Australian dollar/U.S. dollar) – "aussie"
USD/CAD (U.S. dollar/Canadian dollar) – "loonie"
NZD/USD (New Zealand dollar/U.S. dollar) – "kiwi"
These currency pairs, along with their various combinations (such as EUR/JPY, GBP/JPY and EUR/GBP) account for more than 95% of all speculative trading in FX.
What is Spread?
The spread is the difference in price between the buy (ask) and sell (bid) prices quoted for a currency pair when placing a trade on a forex brokers trading platform. It represents the forex broker service costs. Spread is traditionally denoted in pips – a percentage in point, meaning fourth decimal place in currency quotation.
The ask price is the price at which the forex broker is ready to sell a certain Forex Trading currency pair in the online Forex market.
The bid price is the price at which the forex broker is prepared to buy a specific currency pair in the Forex trading market.
Base Currency / Quote Currency
In forex trading the base currency is the first currency quoted in a forex pair.
When buying (or going long on) a currency pair, the base currency is the single unit being bought. It is also known as the primary currency.
The second currency in the pair is known as the quote (or the counter currency) and represents the amount of that particular currency needed to buy a single unit of the base currency.
For instance, when trading GBP/USD, the British Pound is the base currency and the US dollar is the quote.
If it is trading at 1.2983, then 1.2983 dollars would be needed to buy a single British Pound.
A long forex trade will involve buying the base currency while selling the quote currency. A short forex trade will involve buying the quote currency while selling the base currency.
What is volatility?
Volatility is a term referring to price fluctuations relative to the average price over a specified period of time. A market with a high and erratic price range is said to have high volatility.
Forex Trading Software Platforms
Forex brokers allow traders to place trades through a number of trading software platforms. As well as their own proprietary trading software, most brokers offer alternative (external) trading software and apps to trade through, which are downloadable. Some of the most popular external trading software platforms are:
Meta Trader 4 (MT4)
Meta Trader 5 (MT5)