Trading Basics: Key Concepts Explained
If you're new to forex trading, understanding the fundamental concepts is crucial. This guide covers essential terminology to help you navigate the markets confidently.
What is Forex Trading?
Forex (foreign exchange) involves exchanging one currency for another. The forex market enables participants to profit from currency value fluctuations, with brokers providing the necessary trading services.
Beyond currencies, the market offers various instruments including commodities, indices, stocks, and cryptocurrencies. FXTRADING.com provides Contract for Difference (CFDs) products where profit or loss comes from the difference between opening and closing position values.
Key Trading Terminology
Currency Pairs and Classifications
Currency Pair: Two currencies traded against each other (Example: EURUSD, NZDCAD)
Cross Pair: Currency pair without USD (Example: EURGBP, NZDCHF)
Base Currency: First currency in a pair (Example: EUR in EURUSD)
Quote Currency: Second currency in a pair (Example: USD in EURUSD)
Price Components
Bid Price: Price at which you can sell the base currency
Ask Price: Price at which you can buy the base currency
Spread: Difference between Bid and Ask prices, measured in points
Note: Buy orders open at Ask price and close at Bid price; Sell orders open at Bid price and close at Ask price.
Trading Units
Lot: Standard transaction unit (typically 100,000 units of base currency)
Contract Size: Fixed amount of base currency in 1 lot (usually 100,000 for most forex instruments)
Price Measurements
Pip: Standard price change unit (4th decimal for most forex pairs)
Point: Minimum price change unit (5th decimal for most forex pairs)
Pip Size: Position of the pip in price (usually 0.0001)
Pip Value: Monetary value of a 1-pip movement (Pip size × Contract size × Lots)
Capital Management
Leverage: Ratio of equity to borrowed capital
Margin: Funds reserved by broker to keep positions open
Balance: Total result of completed transactions and deposits/withdrawals
Equity: Balance plus/minus floating profit/loss
Free Margin: Equity minus margin (available funds)
Profit and Loss Calculation
Profit/Loss = Price difference between opening and closing × Pip value
Buy orders profit when price rises; lose when price falls
Sell orders profit when price falls; lose when price rises
Risk Management Metrics
Margin Level: (Equity ÷ Margin) × 100%
Margin Call: Warning when margin level reaches a predetermined threshold
Stop Out: Automatic position closure when margin level falls to the stop-out threshold