Basics of Forex pairs
This beginner course guides you through the fundamentals of Forex trading.
Grasping the basics is key for anyone entering the realm of forex trading. At its core, the forex market is driven by currency pairs—pairs that make it possible for traders to exchange one currency for another and speculate on price shifts. In this lesson, you’ll unravel the concept of forex pairs, along with important terms like “pips” and “lot sizes,” so you can approach the market with greater skill and assurance.
Defining forex pairs
A forex pair is made up of two distinct currencies, displaying the value of one relative to the other. For example, in the pair EUR/USD, the Euro (EUR) is called the base currency and the US Dollar (USD) is the quote currency. If the current rate is 1.0697, it means one Euro can be exchanged for 1.0697 US Dollars.
Every forex transaction operates on a simple mechanism: buying a pair means you’re acquiring the base currency and selling an equivalent amount of the quote currency, while selling a pair involves selling the base currency in exchange for the quote currency. Familiarity with this dual-sided process is vital for successful trading.
What are pips?
The term “pip” stands for “percentage in point” and refers to the smallest regular movement in the price of a forex pair—generally marked by the fourth digit after the decimal point. That said, pairs involving the Japanese Yen, such as USD/JPY, count pips at the second decimal place. If, for instance, EUR/USD moves from 1.2050 to 1.2051, the change is exactly 1 pip.
Pips play a major role in evaluating price changes and computing profits or losses from your trades. Mastering how to calculate pip values will not only refine your trade analysis but also strengthen your risk management strategies.
Exploring lot sizes
In forex, the “lot” refers to the standardized quantity of currency being traded. Here are the four common lot sizes to know:
- Standard lot: 100,000 units of the base currency
- Mini lot: 10,000 units of the base currency
- Micro lot: 1,000 units of the base currency
- Nano lot: 100 units of the base currency
Your decision on lot size directly influences your exposure to risk. Trading larger lots increases both potential profit and risk, while smaller lot sizes provide a more controlled trading experience—ideal for those looking to manage their risk more tightly.
Wrapping up
Appreciating the structure of forex pairs, understanding pip values, and choosing the suitable lot size are foundational elements of your trading knowledge. Armed with these tools, you’ll feel more at ease participating in the forex market. Remember, developing effective trading tactics, applying sound money management, and practicing self-discipline are all part of achieving ongoing success as a trader.
We invite you to put these basics to practice on Deriv’s supported trading platforms. Apply what you’ve learned from this lesson—it’s the beginning of a robust journey in forex trading. Wishing you the best as you build your skills!
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Basics of Forex pairs
This beginner course guides you through the fundamentals of Forex trading.
Grasping the basics is key for anyone entering the realm of forex trading. At its core, the forex market is driven by currency pairs—pairs that make it possible for traders to exchange one currency for another and speculate on price shifts. In this lesson, you’ll unravel the concept of forex pairs, along with important terms like “pips” and “lot sizes,” so you can approach the market with greater skill and assurance.
Defining forex pairs
A forex pair is made up of two distinct currencies, displaying the value of one relative to the other. For example, in the pair EUR/USD, the Euro (EUR) is called the base currency and the US Dollar (USD) is the quote currency. If the current rate is 1.0697, it means one Euro can be exchanged for 1.0697 US Dollars.
Every forex transaction operates on a simple mechanism: buying a pair means you’re acquiring the base currency and selling an equivalent amount of the quote currency, while selling a pair involves selling the base currency in exchange for the quote currency. Familiarity with this dual-sided process is vital for successful trading.
What are pips?
The term “pip” stands for “percentage in point” and refers to the smallest regular movement in the price of a forex pair—generally marked by the fourth digit after the decimal point. That said, pairs involving the Japanese Yen, such as USD/JPY, count pips at the second decimal place. If, for instance, EUR/USD moves from 1.2050 to 1.2051, the change is exactly 1 pip.
Pips play a major role in evaluating price changes and computing profits or losses from your trades. Mastering how to calculate pip values will not only refine your trade analysis but also strengthen your risk management strategies.
Exploring lot sizes
In forex, the “lot” refers to the standardized quantity of currency being traded. Here are the four common lot sizes to know:
- Standard lot: 100,000 units of the base currency
- Mini lot: 10,000 units of the base currency
- Micro lot: 1,000 units of the base currency
- Nano lot: 100 units of the base currency
Your decision on lot size directly influences your exposure to risk. Trading larger lots increases both potential profit and risk, while smaller lot sizes provide a more controlled trading experience—ideal for those looking to manage their risk more tightly.
Wrapping up
Appreciating the structure of forex pairs, understanding pip values, and choosing the suitable lot size are foundational elements of your trading knowledge. Armed with these tools, you’ll feel more at ease participating in the forex market. Remember, developing effective trading tactics, applying sound money management, and practicing self-discipline are all part of achieving ongoing success as a trader.
We invite you to put these basics to practice on Deriv’s supported trading platforms. Apply what you’ve learned from this lesson—it’s the beginning of a robust journey in forex trading. Wishing you the best as you build your skills!
Quiz
What best describes a forex pair?
Within currency trading, what is meant by a pip?
