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Currency Trading Basics

The Basic: You Always Sell and Buy At the Same Time

One of the most confusing concepts for people who are not accustomed to forex trading is the idea of “sell high buy low” to gain profit. To put it differently, you “sell” first, then “buy” later. How could I sell something if I don’t have anything in my possession?

It’ll be easier to explain it with examples, so here it is:

You may have seen this before: GBPUSD = 1.5341. It means 1 GBP = 1.5341 USD.

– If you buy EURUSD at 1.3578, it means you RECEIVE 1 EUR and PAY 1.3578 USD. In other words, you buy EUR and sell USD simultaneously.

– If you sell EURUSD at 1.3578, it implies that you PAY 1 EUR and RECEIVE 1.3578 USD. To put it differently, you sell EUR and buy USD simultaneously.

The Concept of Pips

A “pip” (percentage in point) is the tiniest movement that a currency pair may have. Example: present GBPUSD is 1.7657, then it moves up 1 pip, it will become 1.7658. To put it simple, you need to simply watch the decimal number. Generally, 1 pip is 0.0001, but there are cases such as USDJPY where 1 pip is 0.01.

Let me provide another illustration:

– EURUSD is 1.4300, then it moves down 10 pips; thus: 1.4300 – (10 x 0.0001) = 1.4290.

– USDJPY is 101.35, then it moves up 20 pips, tus: 101.35 (20 x 0.01) = 101.55.

The Concept of Leverage

Leverage is a system that enables common people who don’t possess large amount of capital to be involved in currency trading. Quite simply, your broker “lent” you the capital that you need to support your trades.

Example: with 1:300 leverage and USD 500 deposit, you can trade 300 x 100 = USD 150,000 worth of currencies~if you deposit USD 700 and get 1:400 leverage, you could trade 700 x 400 = USD 280,000 worth of currencies.

The Concept of Lots

In currency trading, you trade in “lots”. Usually, the standard size for a lot is 100,000 for any base currency. In other words, if you deposit USD 500 at a forex broker that offer 1:400 leverage, then you can trade 500 x 400 = 200,000 worth of currencies or 2 lots. Depend on your broker, they can also give you 10,000 lot size.

The Concept of Profit and Loss

It’s exactly like any other trades in the world, you will need to buy at low price and sell at high price. The only difference here is you can sell first when the price is high, then buy later once the price has dropped. As I have described above, it is possible since you always buy and sell at the same time.

The profit/loss formula for every currency pair with 4 decimal (such as EURUSD) is:

(pip difference x 0.0001) x lot size x lot volume

Notice:

– Pip difference is sell price – buy price

– if the currency pair is USDJPY, the result is in JPY.

Illustration:

Buy 1 lot of EURUSD at 1.4500, then sell it at 1.4550

Pip difference: (sell price – buy price)/0.0001 = (1.4550 – 1.4500)/0.001 = 50 pips (profit).

Profit = (50 x 0.0001) x 100,000 x 1 = USD 500.

Learning forex trading basics is not as difficult as it may seem. Here’s a way to make it easier: open a practice account in an online forex broker, then get a step by step forex trading lesson that you can apply immediately in the practice account. That way, you can grasp the concept more easily.