FAQ -Forex for Beginners

Forex Trading FAQ

13 FAQ -Forex for Beginners


If you are not very familiar with Forex Trading you should have many questions to ask before you start trading. Here are some answers, starting from the Forex Fundamentals and ending to the Forex Trading Technicals. 

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1) What is Forex Trading?

Forex trading is the procedure of buying and selling currencies in the world Foreign Exchange Market (Forex). Currencies in the Forex markets are traded in pairs in the form of GBP/USD.

2) Who Trades in the Forex Market? 

Many different types of participants are trading in the Forex market: 
  1. Commercial Banks
  2. Central Banks and Governments
  3. Institutional Investors (Hedge Funds etc)
  4. Forex Brokers (ECN/STP and Market Makers)
  5. Retail Traders and Currency speculators
  6. International Trade Companies and others Corporations
  7. World Tourists and Travelers 

3) What is a Forex Currency? 

A currency is a financial asset that is traded in the global Forex Market. The major Forex currencies are seven (7): EUR (euro), USD (US dollar), JPY (Japanese yen), GBP (UK pound), AUD (Australian dollar), CAD, (Canadian dollar), and CHF (Swiss franc).


4) What is a Currency Pair? 

A currency pair is a quotation between two Forex Currencies (i.e. EUR/USD). The first currency in a Forex currency pair (EUR in the example given) is called the base currency. The second currency in a Forex currency pair is called the quote currency (USD in the example given).
Find Articles about Forex Beginners on our Blogs: » What-is-Forex.com

5) What are the Majors Currency Pairs?

The Majors are the most traded currency pairs in the global Forex Market.  The Majors are six (6): EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CAD and USD/CHF.
-These Forex pairs altogether constitute an 85% share in the global Forex Market and provide traders with the highest market liquidity and therefore more favorable trading spreads.

6) What is Bid /Ask Price?

Forex currency pairs are offered using two prices, bid price and ask price. The bid is the price at which a Forex Broker is willing to buy a base currency. The ask is the price at which a Forex Broker is willing to sell a base currency. 

7) What is Forex Trading Spread?

The Forex Spread is the difference between the bidding price and the asking price which is expressed in pips. For example, a Forex Broker that is paying an actual price of 1.2100 for EUR/USD, offers his clients two prices: Buy at 1.2101 and Sell at 1.2099. The difference between the bid and the ask prices is called Forex trading spread.

8) The Trading Spread is the only way a Forex Broker can make a Profit?

Charging a spread is one way that a Forex Broker can make a profit. A Forex Broker makes also a profit by charging commissions on volume and sometimes by charging maintenance and withdrawing fees. Sometimes brokers charge only a trading spread without further commissions. Here is how it works:
  • Dealing Desk Brokers (DD) → High Spreads, High Order Slippage, and NO Trading Commissions
  • ECN/STP Brokers (NDD) → Tight Spreads, No Order Slippage, and Trading Commissions

9) What is Forex Margin?

When opening a Forex trading account a Forex Broker requests from its clients to deposit an amount, as insurance against the losses that they may suffer. This deposited insurance constitutes the initial investment.

10) What is Trading Leverage?

Trading Leverage is the ratio between the value of a trading position and the value of the initial investment that is required as a margin. Usually leverage when trading Forex is between 1:50 and 1:500.
Example: How Leverage and Margin works in Forex
1 mil USD
1 mil USD
1 mil USD
20,000 USD
1 mil USD
10,000 USD
1 mil USD
2,500 USD
*In UK trading leverage is also called gearing and in Australia is also called solvency


11) What is Lot?

Lot is called the smallest size of a currency that you can buy or sell. A standard lot size is 100,000 units of a currency. For example, USD-based pairs have a $100,000 lot size. That means that no matter the leverage ratio you are using, the minimum amount that you can buy or sell is $100,000.
There are three main types of lots:
1) Standard lot size = 100,000 units
2) Mini lot size = 10,000 units
3) Micro lot size = 1,000 units.
Each lot size corresponds to a different Forex Account type. Micro Accounts (usually less than 1,000 USD) are offering a micro lot size while Professional Accounts are offering a standard lot size.

12) What is a Pip?

A pip is called the smallest amount by which the value of a Forex currency pair may alter. For example, if a currency pair (i.e. EUR/USD) alters by just 1 tick, from 1.3000 to 1.3001, then the size of that movement is just 1 pip. 

13) How can I calculate my Trading using gained Pips?

Answer using an example: 
In the following example, a professional trader is using a  standard-lot account and pays only spread and not commissions to his Forex Broker. This trader just closed a $100,000 position (i.e. EUR/USD) at 1.3000, gaining 10 pips. In this case, the profit is 76.9 USD, and this is how: 
Example: How Pips are transformed into Profits/Losses

100,000 USD
EUR/USD at 1.3000
Number of USD per Pip = 100,000 USD x 0.0001 (value of 1 pip) = 10
Value Per Pip = 10 / 1.3000 = 7.69 USD Per Pip
Actual Profit = 7.69 USD Per Pip x 10 Pips = 76.9 USD
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