What is Forex Trading?
Forex (short for Foreign Exchange) is the global marketplace where currencies are traded. It is the largest financial market in the world, with a daily trading volume of over $7 trillion.
Traders buy one currency while selling another at the same time.
The goal is to profit from changes in currency values.
Currency Pairs
In forex, currencies are always traded in pairs (one currency against another).
The first currency is called the base currency.
The second is the quote currency.
Types of currency pairs:
Major Pairs (include USD) → EUR/USD, GBP/USD, USD/JPY
Minor Pairs (no USD) → EUR/GBP, AUD/JPY
Exotic Pairs (major + emerging currency) → USD/TRY, EUR/SGD
Bid and Ask Price
Bid Price → the price at which you can sell the base currency.
Ask Price → the price at which you can buy the base currency.
EUR/USD: 1.1000/1.1002
Bid = 1.1000
Ask = 1.1002
Spread
The difference between the ask price and bid price. This is basically the broker’s commission.
EUR/USD: 1.1000/1.1002 → Spread = 2 pips.
Pip in Percentage(pip)
A pip is the smallest price movement in most currency pairs.
Usually the 4th decimal place (0.0001).
For JPY pairs, it’s the 2nd decimal place (0.01).
Example: EUR/USD moves from 1.1000 → 1.1050 → change = 50 pips.
Lot Size
A lot is the standard trading unit in forex.
Standard Lot = 100,000 units
Mini Lot = 10,000 units
Micro Lot = 1,000 units
Example: Buying 1 lot of EUR/USD = buying 100,000 Euros against USD.
Leverage
Leverage allows traders to control a large position with a small amount of money.
Expressed as a ratio like 1:100, 1:500.
But it also increases risk.
Example: With $1,000 and 1:100 leverage, you can control $100,000 in the market.
Margin
Margin is the money you need to keep in your account to open a leveraged trade.
Example: If you trade $100,000 with 1:100 leverage, required margin = $1,000.
Free Margin
Free Margin is the money left in your trading account that is not tied up in open trades.
It is the available balance you can use to open new positions or to absorb losses.
Formula
Free Margin = Equity – Margin
Total Margin
Total Margin is the sum of all margin requirements from your currently open positions.
It represents the total amount of money that your broker has “locked” from your account balance to keep your trades running.
Formula
Total Margin = Sum of (Margin for each open trade)
Equity
Balance = total money in your account (excluding open trades).
Equity = balance + profit/loss from open trades.
Example:
Balance = $1,000
Open trade profit = $200
Equity = $1,200
Stop Loss (SL)
Stop Loss is a tool that automatically closes your trade if the market moves against you.
It protects your account from big losses.
You set the maximum loss you are willing to take.
Example:
You buy EUR/USD at 1.1000 and set SL at 1.0950.
If the price drops to 1.0950, the trade will close automatically.
Your loss = 50 pips only, instead of unlimited.
Take Profit (TP)
Take Profit is a tool that automatically closes your trade once your profit target is reached.
It locks in your profits without needing to watch the market all the time.
Example:
You buy EUR/USD at 1.1000 and set TP at 1.1100.
If the price rises to 1.1100, the trade will close automatically.
Your profit = 100 pips.
Swap
Swap (also called rollover fee) is the interest you either pay or receive when you keep a trade open overnight.
It happens because every forex trade involves borrowing one currency to buy another. Each currency has its own interest rate, and the difference between those rates is what creates the swap.
Bullish & Bearish
Bullish → market going up (buyers in control).
Bearish → market going down (sellers in control).
Example: If EUR/USD rises from 1.1000 → 1.1200 = Bullish trend.
Liquidity
How easily you can buy/sell without big price changes.
Major pairs = high liquidity.
Exotic pairs = lower liquidity.
Volatility
How much the price moves in a period.
High volatility = fast price swings.
Low volatility = stable market.