Forex trading might seem complicated at first—but once you understand the basic building blocks, it becomes much more approachable.
In this guide, we’ll break down four essential forex terms:
- Currency Pairs
- Pips
- Lots
- Leverage
💱 1. What Are Currency Pairs?
In forex trading, you’re always trading one currency against another. This is why forex trades are done in pairs.
Examples of currency pairs:
- EUR/USD – Euro vs US Dollar
- GBP/JPY – British Pound vs Japanese Yen
- USD/CAD – US Dollar vs Canadian Dollar
Each pair has a base currency and a quote currency:
- Base currency: The first currency (e.g., EUR)
- Quote currency: The second currency (e.g., USD)
📌 If EUR/USD = 1.1000, it means 1 euro = 1.10 US dollars.
📊 2. What Is a Pip in Forex?
Pip stands for “percentage in point” or “price interest point”. It’s the standard unit for measuring price movement in forex.
- For most pairs, 1 pip = 0.0001
- For JPY pairs, 1 pip = 0.01
📈 Example:
If EUR/USD moves from 1.1000 to 1.1010, that’s a 10-pip move.
Pips help traders measure profits and losses in a consistent way.
📦 3. What Is a Lot Size?
In forex, trades are executed in lots (or position sizes). Lot size determines how much of a currency you’re trading.
There are 3 common lot sizes:
| Lot Type | Units | Value per Pip (approx.) |
|---|---|---|
| Standard Lot | 100,000 units | $10 |
| Mini Lot | 10,000 units | $1 |
| Micro Lot | 1,000 units | $0.10 |
📌 Example:
If you trade 1 standard lot on EUR/USD, a 10-pip move equals $100 (10 pips × $10).
⚖️ 4. What Is Leverage in Forex?
Leverage allows you to control a larger position with a smaller amount of capital. It’s expressed as a ratio (e.g., 1:50, 1:100, or 1:500).
Example:
- With 1:100 leverage, a $100 deposit lets you trade up to $10,000.
💡 Leverage amplifies both profits and losses, so it must be used with caution.
⚠️ Use Leverage Responsibly
Leverage can increase gains—but it can also wipe out your account if the market moves against you. Always combine leverage with:
- Stop-loss orders
- Small lot sizes
- Clear risk management strategies
✅ Summary
Let’s recap the four terms:
| Term | Definition |
|---|---|
| Currency Pair | Two currencies traded against each other (e.g., EUR/USD) |
| Pip | Smallest price movement (0.0001 for most pairs) |
| Lot | Trade size; standard, mini, or micro |
| Leverage | Borrowed capital to control larger trades |
📘 Next in the Series:
👉 LESSON 3: How to Read Forex Charts and Understand Price Action
