The Forex Dream provides content for informational and educational purposes only, not financial advice.
Understanding FOREX
What Is Forex?
Forex (foreign exchange) is the act of buying one currency and selling another, at the same time.
You do this in pairs like:
- EUR/USD – Buying the Euro while selling the U.S. Dollar.
- GBP/JPY – Buying the British Pound while selling the Japanese Yen.
Think of it like traveling, when you go to another country and exchange your money, you’re doing a basic forex transaction.
How Do You Make Money in Forex?
You make money in Forex when you buy at a low price and sell at a high price (or the opposite, sell high and buy low).
Example:
- You buy EUR/USD at 1.1000 (means 1 Euro = 1.10 U.S. Dollars).
- Later, it goes up to 1.1050.
- You sell it and make a profit, because now your Euros are worth more.
What Affects Price Changes in Forex?
Currency prices move up and down based on economic news and global events, such as:
- Interest rate changes
- Inflation
- Political stability
- Employment data
- Natural disasters, etc.
These affect whether a country’s economy is seen as strong or weak, which affects the value of its currency.
What is Traded in Forex
You trade what’s called currency pairs.
Some examples:
- Major Pairs: Always include USD (like EUR/USD, GBP/USD).
- Cross Pairs: Don’t include USD (like EUR/JPY, GBP/AUD).
- Exotic Pairs: Include a major and a currency from a smaller economy (like USD/TRY – U.S. Dollar and Turkish Lira).
When Can You Trade in Forex?
The Forex market is open 24 hours a day, 5 days a week (Sunday 5 PM to Friday 5 PM Eastern Time). It moves through different time zones:
- Asia (Tokyo)
- Europe (London)
- North America (New York)
What Tools Do Traders Use?
- Charts (to watch price movements)
- Indicators (to spot trends or patterns)
- News (to understand what’s affecting the market)
- Trading platforms (like MetaTrader or TradingView)
Types of Trades in Forex (Buy vs. Sell)
In Forex, you can make money whether the market goes up or down.
- Buy (Long): You’re buying the first currency and selling the second.
- Example: Buy EUR/USD = You think the Euro will rise against the U.S. Dollar.
- Sell (Short): You’re selling the first currency and buying the second.
- Example: Sell GBP/USD = You think the Pound will fall against the U.S. Dollar.
You profit if the market moves in the direction you chose.
What’s a Pip in Forex?
A pip stands for “percentage in point“. It’s the smallest price change in most currency pairs.
- Most pairs: 1 pip = 0.0001
- For JPY pairs (like USD/JPY): 1 pip = 0.01
Example:
- EUR/USD moves from 1.1000 to 1.1005 → that’s a 5-pip move
- USD/JPY moves from 110.00 to 110.10 → that’s a 10-pip move
What is a Lot Size in Forex?
A lot size in forex is how much of a currency you’re buying or selling in a trade. The bigger the lot, the bigger your profit or loss per pip.
There are 4 common lot sizes:
| Lot Size Name | Lot Size in Decimal | Size in Units | Value per Pip |
|---|---|---|---|
| Standard Lot | 1.00 | 100,000 units | $10 per pip |
| Mini Lot | 0.1 | 10,000 units | $1 per pip |
| Micro Lot | 0.01 | 1,000 units | $0.10 per pip |
| Nano Lot | 0.001 | 100 units | $0.01 per pip |
Smaller Lot Sizes (% of Standard Lot)
Smaller lot sizes are just percentages of a Standard Lot. The standard lot is $10 per pip, so when you trade a smaller lot size, you’re simply trading a fraction (a percentage) of a standard lot, which is the full 100,000 units.
| Lot Type | % of Standard Lot | Units of Currency | Value per Pip (USD) |
|---|---|---|---|
| Standard Lot | 100% | 100,000 units | $10.00 per pip |
| Mini Lot | 10% | 10,000 units | $1.00 per pip |
| Micro Lot | 1% | 1,000 units | $0.10 per pip |
| Nano Lot | 0.1% | 100 units | $0.01 per pip |
- Standard lot is the full size at 100,000 units, worth $10 per pip.
- Mini lot is 10% of a standard lot (10,000 units), worth $1 per pip.
- Micro lot is 1% of a standard lot (1,000 units), worth $0.10 per pip.
- Nano lot is 0.1% of a standard lot (100 units), worth $0.01 per pip.
You can trade partial lots too, like 0.5 lot = $5 per pip (half of a standard lot or 5 Mini lots).
How Profits (or Losses) Are Calculated in Forex
To calculate profit/loss:
Profit = (Pip difference) × (Pip value)
Loss = (Pip difference) × (Pip value)
Example 1:
Profit
- You buy 0.5 lot EUR/USD
- Price moves +10 pips
- Pip value = $5 (because 0.5 lot)
- Profit = 10 × $5 = $50
Example 2:
Loss
- You trade 0.1 lot GBP/JPY
- Price drops 15 pips
- Pip value = $1 (because 0.1 lot)
- Loss = 15 × $1 = $15
Want to trade 50 cents per pip?
You’d need a lot size of 0.05 (that’s 5% of a standard lot), because:
- Standard lot = $10 per pip
- 0.05 lot = $0.50 per pip
Recap
Forex trading is predicting whether one currency will go up or down against another. If you’re right, you make a profit. If you’re wrong, you lose money.
