FOREX super basics

1. Currency pairs
The forex market is almost similar to the stock market. Instead of buying shares, you buy or sell currency pairs in FX (short form for Foreign exchange).

Currencies are traded in pairs, the 4 main pairs that are the most active are:
EUR/USD
GBP/USD
USD/JPY
USD/CHF

Each currency pair is made up of a base currency and a quote currency.
The base currency is the first currency and this is being bought or sold using the quote currency.
Currency pairs are traded in lots or mini lots.

1 lot is 100,000 units, while 1 minilot is 10,000 units

When you buy 1 lot of EUR/USD quoted at 1.4000, you are buying 1 lot of Euro dollars (100,000 Euro dollars) using 1.4000*100,000= 140,000 US dollars.


2. What is PIP
In the Forex market, prices are quoted in pips. Pip stands for "percentage in point" and is the smallest unit for price change. For most currency pairs, 1 pip is the 4th decimal place except the USD/JPY pair where 1 pip is the 2nd decimal place.

When you trade 1 lot of EUR/USD, 1 pip gain in price equals 100,000 * 0.0001 = USD 10 gain
When you trade 1 minilot of EUR/USD, 1 pip gain in price equals 10,000 * 0.0001 = USD1 gain


3. What is spread
Currency pairs’ quotes consist of a 'bid' and 'ask':
The 'bid' is the price at which you can sell the base currency
The 'ask' is the price at which you can buy the base currency
Spread is the difference between the ‘bid’ and ‘ask’ price.
In EUR/USD, a 2 pip spread is quoted as 1.2500/1.2502

The broker earns money from this spread instead of charging commissions.


4. LONG and SHORT
When you buy a currency pair, you are going long on the currency pair, when you sell a currency pair you are going short.


5. Technical Analysis
Using technical indicators like Stochastics, moving average to identify patterns in the market.


6. Candle stick charts
It is one of the most commonly used chart. If the price closes higher than previously, the candle will be green colour. If the price closes lower than previously, the candle will be red.


7. How to earn so much with so little capital?
The answer lies in LEVERAGE. Leverage enables you to hold a position worth up to 100 times more than your margin deposit. For example, a USD 2,000 deposit can command positions of up to USD 200,000 through leverage.