Trading Fundamentals
A practical introduction to currency pairs, bid and ask prices, lot sizes, and how profit and loss are calculated as the market moves.
In the forex market, currencies are quoted in pairs, such as EUR/USD or GBP/JPY. The first currency in the pair is the base currency, and the second is the quote currency. The price tells you how much of the quote currency is needed to buy one unit of the base currency. For example, if EUR/USD is trading at 1.0850, one euro is worth 1.0850 US dollars.
When you go long, or buy, you are taking a position that may benefit if the base currency strengthens against the quote currency. When you go short, or sell, you are taking a position that may benefit if the base currency weakens. In forex trading, every trade involves buying one currency and selling another.
Every quote shows two prices: the bid (the price at which you can sell) and the ask (the price at which you can buy). The difference between them is called the spread, and it represents one of the main costs of trading. Spreads can vary depending on market liquidity, volatility, and the instrument being traded - major pairs typically have tighter spreads than exotic pairs.
Profit or loss is determined by the difference between the price at which a trade is opened and the price at which it is closed, multiplied by the size of the position. Movements are usually measured in pips, which represent small price changes in a currency pair. Unrealised profit or loss changes as the market moves and becomes realised once the position is closed.
Trade sizes are measured in lots. A standard lot is 100,000 units of the base currency, a mini lot is 10,000, and a micro lot is 1,000. Position sizing is an important part of risk management because larger positions increase the value of each price movement, which can increase both potential gains and potential losses.
Leverage allows traders to control a larger position with a smaller amount of capital. Margin is the amount of funds required to open and maintain a leveraged position. While leverage can increase market exposure, it can also amplify losses, so understanding how margin requirements work is important before placing leveraged trades.
Common order types include market orders, which are executed at the best available price; limit orders, which are executed only at a specified price or better; and stop orders, which become active when the market reaches a chosen level. Stop-loss and take-profit orders can help define exit levels in advance, allowing trades to close automatically once specified levels are reached.
Open a free demo account to explore how orders, spreads, and price movement work using virtual funds in a simulated trading environment.