Forex Trading: Currency Pairs

Forex Trading

Currency Pairs

• Forex trading involves trading currency pairs, where one currency is exchanged for another
• Currency pairs are represented by three-letter codes, such as EUR/USD (Euro vs. US Dollar)
• There are three types of currency pairs:
  • Major currency pairs: most traded and liquid, e.g. EUR/USD, USD/JPY
  • Minor currency pairs: less traded but still liquid, e.g. EUR/JPY, GBP/CHF
  • Exotic currency pairs: less traded and less liquid, e.g. USD/TRY, EUR/CZK

Leverage

• Leverage is a loan provided by the broker to the trader, allowing them to trade with more capital than they have
• Leverage is expressed as a ratio, e.g. 1:50, 1:100, 1:200
• Leverage can increase potential gains, but it can also increase potential losses
• Traders should use leverage wisely and carefully manage their risk

Pip Calculation

• A pip is the smallest unit of price change in a currency pair, usually 0.0001 (1/100th of 1%)
• Pip value is calculated by multiplying the trade size by the pip value, e.g. $10/pip for a one-lot trade
• Pip calculation is important for determining profit and loss, as well as setting stop-loss and take-profit levels

Stop Loss

• A stop-loss order is an order that automatically closes a trade when it reaches a specified price level
• Stop loss is used to limit potential losses by closing a trade when it moves against the trader
• Stop loss can be set as a fixed price, a percentage of the trade, or as a trailing stop loss

Technical Analysis

• Technical analysis is a method of analyzing price charts to predict future price movements
• Technical analysis uses various indicators, patterns, and chart formations to identify trends and trading opportunities
• Common technical analysis tools include:
  • Moving averages
  • Relative strength index (RSI)
  • Bollinger bands
  • Fibonacci retracement
  • Chart patterns (e.g. head and shoulders, triangles)

Forex Trading

Currency Pairs

• Forex trading involves exchanging one currency for another, represented by three-letter codes (e.g. EUR/USD for Euro vs. US Dollar)
• Major currency pairs are the most traded and liquid, including EUR/USD and USD/JPY
• Minor currency pairs are less traded but still liquid, such as EUR/JPY and GBP/CHF
• Exotic currency pairs are less traded and less liquid, including USD/TRY and EUR/CZK

Leverage

• Leverage is a loan from the broker to the trader, allowing them to trade with more capital than they have
• Leverage is expressed as a ratio (e.g. 1:50, 1:100, 1:200), increasing potential gains and losses
• Traders should use leverage wisely and manage risk carefully

Pip Calculation

• A pip is the smallest unit of price change in a currency pair, usually 0.0001 (1/100th of 1%)
• Pip value is calculated by multiplying trade size by pip value (e.g. $10/pip for a one-lot trade)
• Accurate pip calculation is crucial for determining profit/loss and setting stop-loss and take-profit levels

Stop Loss

• A stop-loss order is an automatic order that closes a trade when it reaches a specified price level
• Stop loss limits potential losses by closing a trade when it moves against the trader
• Stop loss can be set as a fixed price, percentage of the trade, or trailing stop loss

Technical Analysis

• Technical analysis predicts future price movements by analyzing price charts
• Technical analysis uses indicators, patterns, and chart formations to identify trends and trading opportunities
• Common technical analysis tools include moving averages, RSI, Bollinger bands, Fibonacci retracement, and chart patterns (e.g. head and shoulders, triangles)

Learn about Forex trading, including the different types of currency pairs, such as major, minor, and exotic pairs. Understand how to represent currency pairs with three-letter codes.