Introduction to FOREX [THREAD]

Forex is short for foreign exchange which is the exchange of currencies.

In forex, you trade one currency for another.

Forex is quoted in currency pairs.

Each currency is given a 3 letter code.

EUR - Euro
USD - US Dollar
GBP - British Pound
JPY - Japanese Yen
CHF - Swiss Franc
AUD - Australian Dollar
CAD - Canadian Dollar
NZD - New Zealand Dollar

The 7 more common and liquid pairs are:

EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, NZD/USD and USD/CAD

Currency Exchange Rates

Currencies are quoted in pairs and mostly in 4 decimal places.

For example,

EUR/USD = 1.3505

EUR = Base currency
USD = Quote Currency

The base currency always has a value of 1.

In this case 1 EURO = 1.3505 US dollars

If you want to buy 1 Euro, you would pay 1.3505 USD.

If you want to sell 1 Euro, you would receive 1.3505 USD.

While all others pairs are quoted to 4 decimal places
(1 pip = 0.0001), the JPY pairs are quoted to 2 decimal places (1 pip = 0.01)

For example,

USD/JPY = 98.73

USD = Base
JPY = Quote

This tells us that 1 USD is = to 98.73 Japanese Yen

PIP (Price Interest Point)

A pip is the smallest change in value for any given forex quote.

For all non-JPY forex pairs, 1 pip represents the 4th decimal place of the quote.

When the EUR/USD moves from 1.3505 to 1.3506, it is a movement of 0.0001 of 1 pip.

For JPY forex pairs, 1 pip represents the 2nd decimal place of the quote.

When USD/JPY moves from 80.55 to 80.87, it is a movement of 32 pips.

Contract Lot Sizes

A standard lot is 100,00 units of the base currency
A mini lot is 10,000 units of the base currency
A macro lot is 1,000 units of the base currency
A nano lot is 100 units of the base currency

Calculating Forex Profits

Profit/Loss =

Number of pips x Number of lots x $ Value per pip per standard lot

$ Value Per Pip Per Standard Lot is about $10 USD

The Power Of Leverage

In forex, brokers allow traders to leverage up to 1:500.

This means you can buy/sell USD 100,000 with only 1,000 USD margin.

In most trading situations, we usually only leverage up to 1:50.

Leverage = 1:10 | Margin Required = 10%
Leverage = 1:50 | Margin Required = 2%
Leverage = 1:100 | Margin Required = 1%

4 Types Of Forex Traders

1. Scalpers
2. Day Traders
3. Swing Traders
4. Position Traders

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