5 Forex Trading Concepts That Every Trader Should Know | Currency Trading Courses

Trading in currencies requires a trader to be well-prepared with all the concepts, skills, strategies, and market conditions in order to minimize risk and execute a perfect trade. If you are beginning to trade and feel overwhelmed witnessing the vastness of forex trading, don’t worry! The first thing you should consider doing is getting a proper understanding of the basic concepts and then going forward by enrolling in one of FXCareers online currency trading courses. In this blog, we will help you understand the top 10 fundamental forex trading concepts that you should know to form a strong foundation for trading in forex.

1. Currency Pairs – The Basic Element of Currency Trading

In forex trading, currencies are quoted in pairs, representing the relative value of one currency against another. Currency pairs are quoted in terms of the base currency (the first one listed) against the quote currency (the second one listed). Major pairs, such as EUR/USD or GBP/USD, involve currencies from strong economies and witness high trading volumes. Understanding these pairs aids traders in predicting price movements and devising informed trading decisions. Additionally, understanding the correlation between currency pairs and their influence on one another is key in risk management strategies.

Major, Minor, and Exotic Currency Pairs

Major pairs consist of the most heavily traded currencies globally, while minor pairs don’t include the US dollar but still exhibit significant trading volumes. Exotic pairs involve one major currency and one from a developing country.

Major Currency Pairs:

EUR/USD (Euro/US dollar)
USD/JPY (US dollar/Japanese yen)
GBP/USD (British pound/US dollar)
USD/CHF (US dollar/Swiss franc)
AUD/USD (Australian dollar/US dollar)
USD/CAD (US dollar/Canadian dollar)
NZD/USD (New Zealand dollar/US dollar)

Minor Currency Pairs:

EUR/GBP (Euro/British pound)
EUR/JPY (Euro/Japanese yen)
GBP/JPY (British pound/Japanese yen)
GBP/CAD (British pound/Canadian dollar)
CHF/JPY (Swiss franc/Japanese yen)
EUR/AUD (Euro/Australian dollar)
NZD/JPY (New Zealand dollar/Japanese yen)

Exotic Currency Pairs:

USD/TRY (US dollar/Turkish lira)
USD/BRL (US dollar/Brazilian real)
USD/MXN (US dollar/Mexican peso)
USD/ZAR (US dollar/South African rand)
USD/SGD (US dollar/Singapore dollar)
USD/CZK (US dollar/Czech koruna)
USD/HUF (US dollar/Hungarian forint)

Which Currency Pair Should You Choose?

The ideal currency pairs to trade will be determined by the level of your experience, risk tolerance, and trading objectives. It is often suggested that beginning traders begin with major currency pairings because they are the most liquid and have the tightest spreads. If you are comfortable with more risk and volatility, you can start trading minor and exotic currency pairings as you gain knowledge and experience. Enroll in our online currency trading courses to learn about currency pairs in detail and to build your consistently profitable trading strategy.

2. PIPs (Percentage in Point) – The Measure of Smallest Price Change

Percentage in Point, or simply PIP, is the smallest change in the price of a currency. It’s a unit of measurement used to quantify the change in value between two currencies. The change mostly occurs at the fourth decimal value of the currency quote.

The majority of currency pairs are quoted to four decimal places, except for some pairs involving the Japanese yen, which are quoted to two decimal places. For most pairs, a pip is typically the fourth decimal place. For instance, if the EUR/USD pair moves from 1.2000 to 1.2001, that is a one-pip movement.

Calculating Profit and Loss in Pips

Pips play an important role in defining profits and losses in forex trading. The difference in pips between the entry and exit points of a trade indicates the gain or loss. If a trader enters a position at 1.3000 and the price moves to 1.3020, they have gained 20 pips.

Pip Value and Lot Sizes

The value of a pip depends on the lot size traded and the currency pair being traded. Different lot sizes (standard, mini, micro) affect the value of a pip. For standard lots (100,000 units), a one-pip movement equals a larger monetary value compared to mini (10,000 units) or micro (1,000 units) lots.

Variation with Different Currency Pairs

It’s essential to note that the value of a pip varies across different currency pairs due to variations in exchange rates and lot sizes. For instance, the value of one pip for EUR/USD may not be the same as the value of one pip for GBP/JPY.

To get the best training and understanding of the importance of pips and to take advantage of its movements, enroll in FXCareers online currency trading courses, where we will teach and train you with all the essential and advanced trading concepts.

3. Lots – The Size of a Trade

A lot in forex trading can be defined as a standardized unit of measurement that represents a specific number of currency units. Lots are used to quantify the size of a trade, and different brokers may offer different lot sizes. The most common lot sizes are:

Standard lot: This is the largest lot size and is equal to 100,000 units of the base currency.
Mini lot: This is a smaller lot size that is equal to 10,000 units of the base currency.
Micro lot: This is the smallest lot size and is equal to 1,000 units of the base currency.

Different currency trading brokers provide you with different lot sizes to trade with. The lot size that you will choose should be based on your trading strategy and the level of your risk tolerance. To build your consistently profitable trading strategy, take our training in financial markets, through which you can learn to develop your trading style.

4. Long and Short Positions – Betting on Price Direction

Long and Short Positions are the fundamental trading concepts where a trader bets on the price movements of assets they are trading, including currencies. In simple terms, long and short indicate the direction in which a trader expects the price of an asset to move.

In the case of currency trading, when you buy any currency pair, you are actually taking a long position in the base currency and a short position in the quote currency. This means that you are betting that the value of the base currency will increase in comparison to the quote currency.

On the other hand, when you sell a currency pair, you are taking a short position in the base currency and a long position in the quote currency. This means that you are betting that the value of the base currency will decrease relative to the quote currency.

In terms of profit and loss, when you make a profit on a long position, it means that the price of the currency pair has risen. When you make a profit in a short position, it means that the price of the currency pair has fallen.

5. Leverage and Margins – Tools for Power Trading

Leverage and Margins are some of the most significant trading concepts that you should especially learn and understand because of the power it provides to traders. As the name suggests, leverage allows traders to control large positions in the market with less capital.

It is essentially a credit that is provided to you by your forex broker. The amount of leverage that you can use is expressed as a ratio. For example, if you have a leverage ratio of 100:1, this means that you can control $100,000 worth of currency for every $1,000 that you deposit in your trading account.

Margin is the amount of money that you must deposit with your forex broker in order to open a position. It is a percentage of the total value of the position. For example, if you have a margin requirement of 1%, this means that you must deposit $1,000 to open a $100,000 position.

Margin is used to protect the forex broker from losses in case the price of the currency pair moves against you. If your margin account falls below the margin requirement, your broker may issue a margin call, which means that you will be required to deposit more money into your account to keep your position open.

To master the art of trading with leverage, margin, and other important trading concepts, enroll in FXCareers online currency trading courses, where you get the best learning and training with professional mentors and live trading sessions.

Enrol with FXCareers and Secure Your Future as a Trader

FXCareers is a prominent financial market and currency trading learning institute. It is your go-to academy for training in the currency markets. Apart from currency trading programs, we provide general training via our other programs like technical analysis crypto course, through which you can trade in crypto and other markets as well. With FXCareers, you get all the foundational trading knowledge, hands-on training with live trading sessions, online currency trading courses for traders of all levels, and the best guidance to become an advanced and successful trader. Enroll with FXCareers today and secure your future as a successful currency trader.