Foundational Takeaway
The Foreign Exchange (Forex or FX) market is the world’s largest, most liquid financial market, transacting upwards of $7.5 trillion per day according to the Bank for International Settlements (BIS). Unlike centralized stock exchanges, Forex operates as a decentralized Over-The-Counter (OTC) network open 24 hours a day, 5 days a week.
1. Understanding Currency Pairs: Base vs. Quote
In forex trading, currencies are always traded in pairs. When you enter a trade, you are simultaneously purchasing one currency while selling another. A currency pair is written as two three-letter ISO currency codes:
EUR / USD = 1.0850
- Base Currency (EUR): The first currency. In this pair, 1 Euro equals 1.0850 US Dollars.
- Quote Currency (USD): The pricing currency. Fluctuations are calculated in units of the quote currency.
2. Major, Minor, and Exotic Currency Pairs
| Category | Representative Pairs | Characteristics | Typical Spread |
|---|---|---|---|
| Major Pairs | EUR/USD, GBP/USD, USD/JPY, USD/CHF | Paired with USD; deepest global liquidity | 0.0 – 0.8 pips on IC Markets |
| Minor Crosses | EUR/GBP, EUR/JPY, GBP/JPY, AUD/NZD | Major currencies without USD | 1.0 – 2.5 pips |
| Exotics | USD/TRY, USD/ZAR, EUR/PLN | Emerging market currencies; higher volatility | 10 – 50+ pips |
3. What Is a Pip and How Is Pip Value Calculated?
A pip (Percentage in Point) represents the standard unit of measurement for exchange rate fluctuations. For most currency pairs, a pip is the fourth decimal place (0.0001). For Japanese Yen (JPY) crosses, a pip is the second decimal place (0.01).
Lot Sizes and Pip Values:
- Standard Lot (1.00 lot): 100,000 units. 1 pip on EUR/USD = $10.00.
- Mini Lot (0.10 lot): 10,000 units. 1 pip on EUR/USD = $1.00.
- Micro Lot (0.01 lot): 1,000 units. 1 pip on EUR/USD = $0.10.
4. Protecting Your Capital
Mastering mechanics is merely the foundation. To trade sustainably, you must understand how different forex order types protect your entries and how to enforce the 1% position sizing rule on every trade.