Before starting to trade Forex, you need to understand the basic concepts of the Forex market in order to understand how the forex market works. Basic concepts, terms such as balance, margin, spread, … are used to observe reality, understand the basic indicators when placing orders and know that how they are related to your account. So as to master the calculation method when placing an order, mastering the basic concepts of the Forex market is the first steps to familiarize yourself with the market. Let’s learn about these concepts with “top4forexbrokers.net“
1. Pip and Lot
Pip is a unit of measurement showing the change in value between a currency pair.
For example: if EUR / USD is at 1.2360 and it turns to 1.2361 then the value increases by 0.0001. That means, it has increased by one pip.
Lot is a lot of currency units. A standard lot is equal to 100,000 basic currencies / currencies in your account. It means that if you want to trade EUR / USD, you will need $ 100,000. There are two other popular lot sizes: mini lot (equivalent to 10,000) and micro lot (equivalent to 1,000 units).
Leverage is simply known that you borrow money from an exchange to trade a larger amount of money than you actually have in your account.
For example: To open an order of EUR / USD needs 100,000 USD, when using leverage at 1: 100 ratio you only need 100 USD.
In other words, leverage is a tool that allows you to trade 100 times the amount of money you actually have in your account.
The price’s difference between the ask and ask price is called Spread. And spreads are calculated by pips
For example: When you look at the USD / VND exchange rate at ACB, you will see that the selling price and the purchase price in which the selling price is always higher than the buying price. The difference between the selling price and the buying price is the spread. Spread is the main source of revenue forex brokers (except for some platforms that collect commission from customers).
Margin is also known as margin ratio, it is a deposit to maintain open positions, the initial money to enter an order. The margin ratio is determined by the leverage you choose.
For example: To trade without leverage, you need to deposit USD 100,000 in your account. However, with a leverage ratio of 1: 100, you only need USD 100 in your account
This is what makes the Forex market attractive when brokers provide traders with leverage to allow them to trade more than they actually have.
Equity is the value of the principal account (balance) plus minus immediate profit and loss of all open positions in the account. Instantaneous capital represents the temporary value of the account at some point, it changes constantly when trading. Equity value will become the real value of the account if at that time we close all open orders immediately.
6. Currency units
When investors trade on FOREX, they buy or sell on a currency pair. The exchange rate for each pair varies by which currency is stronger at the time of trading. Trading pairs are denominated in one currency versus another. They are denoted as currency 1 / currency 2.
For example: If you are trading the euro against the US dollar, it will be denoted EUR / USD.
The major currency pairs are all pairs that contain US Dollars (USD). They are the most frequently traded pairs on FOREX. And they are also the most liquid pairs.
Synthesized by top4forexbrokers.net