Lesson 2: Market Foundations
You'll Learn: Core concepts every trader needs to understand currency values and trade effectively
Currency Pairs
What Are Currency Pairs?
A currency pair shows the value of one currency (base) against another (quote). Always traded as a pair because you're buying one currency while selling another.
Travel Example:
If EUR/USD = 1.12:
- Base Currency: 1 Euro
- Quote Currency: 1.12 US Dollars
You need $1.12 to buy €1
Major Pairs
Definition: Pairs containing USD + another major currency
- EUR/USD (Euro/Dollar)
- USD/JPY (Dollar/Yen)
Why They Matter:
• 80% of daily trades
• Spreads: 0.8-1.5 pips
Cross Pairs
Definition: Pairs without USD
| Pair | Name | Spread |
|---|---|---|
| EUR/GBP | Euro-Pound | 2-3 pips |
Example Trade:
Buy EUR/GBP at 0.8550 → Sell at 0.8575
Profit: 25 pips
Understanding Pips
What's a Pip?
Pip = Smallest price movement in forex, usually 0.0001 (except JPY pairs: 0.01)
Pip Calculation:
For EUR/USD:
1.0850 → 1.0855 = 5 pips
For USD/JPY:
150.00 → 150.05 = 5 pips
Visual representation of pip value calculation
Lot Sizes
What is a Lot?
Lot = Trade size measurement. 1 standard lot = 100,000 units
Micro Lot
Definition: 1,000 units (0.01 standard)
Example:
10 pips × $0.10 = $1 profit
Standard Lot
Definition: 100,000 units
Example:
10 pips × $10 = $100 profit
Bid/Ask Prices
Key Terms:
- Bid: Price buyers will pay (you sell here)
- Ask: Price sellers will accept (you buy here)
- Spread: Difference between Bid/Ask
Live Market Example:
Trade Cost: 2 pips × $10 = $20 per standard lot
Test Your Knowledge
Q1: If GBP/USD moves from 1.2750 to 1.2775 with 2 mini lots:
Why?
25 pips × $2 per pip (2 mini lots) = $50
Bid/Ask Analogy:
Like selling a used phone:
- Bid: What buyers offer ($300)
- Ask: What you want ($320)
- Spread: $20 difference