Before getting into any forex trading strategies and technical analysis there are a few basic things that you should know. Below are terms that every trader must know.
Going long – Going long is taking a trade where you buy the currency pair.
Going Short – Going short is taking a trade where you sell the currency pair.
Pips – A pip is the most common standardized unit that is used in forex trading. It is 0.0001 for currency pairs that are related to US dollars and 0.01 for currency pairs that are related to the Japanese Yen.
Pipette – A pipette is 1/10th of a pip. A pipette is not very commonly used among traders. In this guide, we will not be using a pipette.
Quote – a quote is the price of a currency in terms of the other currency in the currency pair.
Ask Price – this price is the price on the right-hand side of a quote. It is the buying price for the currency.
Bid Price – this price is the price on the left-hand side of a quote. It is the selling price for the currency.
Exchange Rate – It is simply the currency of one country against the currency of the other country.
Margin – The amount of money the trader puts in order to maintain the trade.
Spread – The spread is the difference between the ask and the bid price. The asking price is higher than the bid price. Spread is the amount that the broker makes when you execute a particular trade.
Lot – It is the standard unit of measurement. For example, if you buy 1 lot (standard lot) that means that you buy 100,000 units of the currency. There is also a mini lot (10,000 units) and a micro lot (1,000 units).
Leverage – Basically, leverage is the number of funds that the broker loans you. Some brokers provide you with up to 1000 times of leverage. We do not recommend you trade with too much leverage. Higher leverage means higher risk. We will talk more about how much leverage to use later.
Calculating Pips
Let us calculate the number of pips that you gain or lose when you make a trade. For example, let us use EUR/USD = 1.22972. Since it is a USD pair, 1 pip is equal to 0.0001. Let us say that you buy the currency at 1.22972 and the price moved by 2 pips. That means the price increased by 0.0002, so the price will be 1.22992. But how do we know how much in dollars we made? Well, it depends on the lot’s value.
Let us say that you traded using a standard lot using leverage. That means the value of the currency pair will be 1.22972 *100,000 EUR = 122,972 USD. Then, after the movement of 2 pips the profit you have made will be, 122,992 USD – 122,972 USD = 20 USD