Forex Fundamentals

Forex terms, currency quotes and fundamental trading strategies, this section provides basic knowledge and a complete information about Forex.

Forex Basic Terminology

Currency pair quotes

Here’s an example of a Forex quote for the euro vs. the U.S. dollar:

EUR/USD = 1.32105

The first currency in the pair that is located to the left of the slash mark is called the base currency, and the second currency is called quote currency.

If you buy the EUR/USD, the exchange rate tells you how much you need to pay in terms of the quote currency to buy one unit of the base currency. Here in this example you have to pay 1.32105 U.S. dollars to buy 1 euro.

When you sell the EUR/USD the exchange rate tells you how much of the quote currency you receive for selling one unit of the base currency. In other words, you will receive 1.32105 U.S. dollars if you sell 1 euro.

Bid/Ask price

Bid Price –the price at which your broker will buy a specific currency pair from you.
Ask Price –the price at which your broker will sell a specific currency pair to you.
Bid/Ask Spread –the difference between the bid and ask the price.

Pip

The smallest increase of price movement a currency can make. For example, 1 pip for the EUR/USD = 0.0001 and 1 pip for the USD/JPY = 0.01.

How to place orders

In Forex, there are three types of orders:

1. Market Order

Market order is used when you want to execute an order immediately at the market price.

This order is also used when you want to enter a new position or to exit an existing position.

2. A Stop Order

A stop order is used only when a specified price is reached. For example, a buy- stop order is an instruction to buy a currency pair once the market reaches your specified price or is higher.

A sell-stop order is an instruction to sell the currency pair at the market price once the market reaches your specified price or is lower.

Stop orders are used to enter a market when you trade breakouts or to limit your losses.

3. Limit order

A limit order allows you to exit the market at your set profit objective. If you sell a currency pair, you will use the limit-sell order to place your profit objective. If you buy, the limit-buy order should be used to place your profit objective.