FX Terms Simplified: A Beginner's Guide to Understanding Foreign Exchange
Leverage : Leverage allows you to control a larger position with a smaller amount of capital. It magnifies both potential profits and losses. For example, with 1:100 leverage, you can trade $100,000 worth of currency with just $1,000 in your account. However, be cautious as higher leverage increases risk. Lot : A lot refers to the standard unit size of a currency trade. In FX, there are three common lot sizes: Standard Lot (100,000 units), Mini Lot (10,000 units), and Micro Lot (1,000 units). Trading smaller lots is recommended for beginners to manage risk. Pips : A pip is the smallest price movement in the exchange rate of a currency pair. It stands for "Percentage in Point." Most currency pairs are quoted to four decimal places, and a pip is typically the last decimal place. For example, if the EUR/USD exchange rate changes from 1.2000 to 1.2005, it has moved 5 pips. Bid and Ask Price: The bid price is the highest price a buyer is willing to pay for a currency pair, while t...