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Forex Trading 101: Trading Forex

June 8, 2015

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Last update: July 2021

In this chapter of Forex Trading 101, we’re going to analyze the definitions of the market. While there are tons of similarities to stocks and futures trading, there are some differences.

Forex Definitions Video

Currency Quote

First, currencies aren’t listed like stocks; they are traded in pairs. The currency pair has two currencies listed such as the EUR/USD or the USD/CAD. The first currency is the base currency. The base currency is what we make the initial transaction and is also what the chart represents.

Fig 1

The above chart is the EUR/USD, which is in a bearish downtrend. This means the EUR is depreciating against the USD while the USD is appreciating against the EUR. The USD is the second currency listed in the currency pair and is called the counter or quote currency. Simply put, you’re exchanging one currency for the other. If you buy the EUR, you sell the USD and if you sell the EUR, you are buying the USD. In essence, it really doesn’t matter which one is listed first.

Leverage and Position Size

Currencies are highly leveraged tradable instruments. In the United States, they’re leveraged at 50-1, which is one of the lowest in the world. This means if you place a $1000 dollars into a trade, you actually control $50,000. Leverage can be a great way to reduce your cost dramatically, but it can be a double-edged sword. To control the risk of leverage, we place less than 2% of available capital into short term trades. You simply do not need to place more than that to effectively trade currencies. In longer term trades, such as carry trades, you can place up to 4%.

Contract Size

The total amount of money controlled in the trade is known as the contract size. This includes the amount borrowed as well as the amount placed in the trade. If we place a $1000 into the trade, we borrow $49,000 and control a total of $50,000.

Lot Size

While you can place whatever you want into a currency trade, typically we trade in terms of a lot size. This is similar to a contract in the options market or shares in a stock trade. There are three types of forex accounts: micro, mini, and standard. Micro accounts trade in increments of 1000, mini are traded in increments of 10000, and standard in increments of 100000. Typically, most forex traders trade minis while larger accounts of 25000 or more might trade standard lots sizes. Once again, you don’t have to place a ton in a trade to control a lot.

PIP

This stands for percentage in point or as it’s more commonly referred to as price interest point. The PIP is the lowest denomination a currency will trade and is typically the 4th decimal listed in the currency quote. In the EUR/USD, it’ll be listed as 1.2539 with the 9 being the PIP. In the USD/JPY pair, it’ll be listed as 1.15 with the second decimal being the PIP. Outside the USD/JPY pair, all majors are traded in a 4th decimal. The value of each PIP is dependent on the contract value.

Tick value

The value of each PIP is relative to the contract value.

AccountContract ValuePosition SizePip Value
1) Micro:1000$20.10 cents
2) Mini:10000$200$1
3) Standard:100000$2,000$10

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3 Replies to “Forex Trading 101: Trading Forex”

  1. KatarinaSimons says:
    June 21, 2015 at 7:22 pm

    Matt, I love this video, what a great job.
    I have 2 questions for you or your team.
    1. This video is Chapter 3. I was looking for Chapter 1 and 2 and I could not find it. Would you happen to know if I have access to it as a rookie member? If I do, where can I find them?
    2. Second question. If I place $20 into the trade (control $1000) and my loss on $1000 is $100, is my loss 50-1 which would be $2 or the $100?

  2. Khurshed Birdie says:
    July 3, 2015 at 8:49 am

    Great video, Matt.

  3. JUANTORRES says:
    September 3, 2015 at 9:10 am

    Thx Matt great video

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