Lesson 2 Key Terminology in Forex Trading
Welcome Back to Forex Trading 101!
To navigate the forex market effectively, you need to understand some key terms. Don’t worry; we’ll keep it simple and straightforward.
1. Pips: The Building Blocks of Forex Trading
A pip is the smallest price move that a currency can make. Think of it as a penny for forex. If the EUR/USD moves from 1.1000 to 1.1001, that’s a one pip change. Pips are crucial for calculating your profit or loss.
2. Lots: How Much Are You Trading?
Forex is traded in lots, which are standardized units of currency. There are three types:
- Standard Lot: 100,000 units of the base currency.
- Mini Lot: 10,000 units.
- Micro Lot: 1,000 units.
If you’re just starting, micro lots are a good way to trade without risking too much.
3. Leverage: Amplify Your Trading Power
Leverage allows you to control a large position with a small amount of money. For example, with 50:1 leverage, you can control $50,000 with just $1,000. But be careful—while leverage can increase your profits, it can also magnify your losses.
4. Spread: The Cost of Trading
The spread is the difference between the bid (buy) price and the ask (sell) price. It’s essentially the cost of making a trade. A smaller spread means lower trading costs for you.
5. Margin: Your Security Deposit
Margin is the amount of money you need to open and maintain a leveraged position. Think of it as a security deposit that the broker holds. If your trade goes against you, the broker can use this margin to cover losses.
Let’s Recap:
- Pips: Smallest price change in forex.
- Lots: Units of currency traded (standard, mini, micro).
- Leverage: Amplifies your trading power but also your risk.
- Spread: The cost difference between buy and sell prices.
- Margin: Security deposit to cover potential losses.