FOREX PRINCIPLES AND TERMS

               5 Key Principles & Terms

1. Bulls and Bears

What is the first symbol of the financial markets that pops into your mind when you think about Wall Street?

Most probably it is the bronze sculpture of the Charging Bull.

This iconic bull is the symbol of aggressive financial optimism and prosperity. It has an opposite character – a bear — and together, they represent the dual nature of the financial markets.

The terms “bullish market” and “bearish market” are often used when describing the underlying trends of the market. 

Bullish or “bull market” is when the market is showing confidence: currency or stock prices are going up.

A bullish trader believes the market will rise.

This term is used because when bulls fight, they throw their opponents up in the air with their horns.

Bear market

Bearish or “bear market” is when a currency or a stock rate goes down.

Bearish traders are the ones who believe that the rate will decrease. When bears fight, they push their opponents to the ground. 

This is how you can remember how to distinguish between these two terms.

2. Pips and Pipettes

Pips

A price interest point (pip) is the most important unit of measurement in forex. It measures the change in the exchange rate for a currency pair. 

A pip is one unit of the fourth decimal point in a currency rate. So for dollar currencies, a pip is 1/10,000 of a dollar.

There is one exception, however.

All currency pairs involving the Japanese yen are quoted to only two decimal places (0.01). So one pip in yen pairs is one unit of the second decimal point.

This is because the yen is much closer in value to 1/100 of other major currencies.

Pipettes

A pipette is a fraction of a pip; it is 1/10 of a pip.

They appear as the 5th (3rd decimals for yen pairs) in a currency rate. Some brokers use pipettes to allow tighter spreads.

3. Spread

For traders, the spread is the cost of trading.

You can think of spread as the commission for the broker or bank for their services.

4. Lots

When you buy beer, you usually buy a six-pack instead of a single can.

In forex, currencies are traded in specific amounts called lots.

The standard size of a lot is 100,000 units of the base currency.

However, there are also smaller types of lots: 

• Mini lot = 10,000 units of the base currency

• Micro lot = 1,000 units of the base currency

• Nano lot = 100 units of the base currency

The smaller lots allow traders to better manage their risk by adjusting the size of their trades based on their account size and their level of comfort with risk. 

5. Leverage

Leverage allows you to trade with more resources than you have, thus increasing the potential profits without depositing super large sums.

Basically, leverage is a loan from the broker.

The average maximum leverage in the U.S. is 1:50, and Europe 1:30.

A couple of years ago, the maximum leverages were up to 1:500. But due to widespread losses suffered by beginner traders, the maximum leverages were reduced.

The average daily currency rate changes are 1%-3% so if you opened a position without the use of leverage, it would take quite a long time to double your money.

With the help of leverage, you can achieve the desired results up to 50 times faster.

As mentioned earlier, using leverage is risky, therefore use it with caution.