Trading concepts, explained

Forex, short for foreign exchange, is the global market where one currency is traded for another. You always trade in pairs, like EUR/USD, because buying one currency means selling another at the same time. The price of a pair tells you how much of the second currency it costs to buy one unit of the first.

Pip value is how much money one pip of price movement is worth on a single trade, based on the pair you trade and your position size. A pip is the standard smallest unit a forex price moves, usually the fourth decimal place (0.0001), except on yen pairs where it is the second decimal (0.01). Calculating pip value lets you turn a price move in pips into an actual cash amount, which is the foundation of sizing a trade and measuring your risk.

A candlestick chart shows you how price moved over a set period using small rectangles called candles. Each candle records four prices for that period: the open, the high, the low, and the close (together called OHLC). Once you can read one candle, you can read a whole chart, because the same shape repeats over and over.

Support and resistance are price levels where a currency pair has stopped and turned around before. Support sits below the current price, where buyers have tended to step in. Resistance sits above it, where selling has tended to take over. Traders watch these levels because price often reacts at them again, though there is no guarantee it will.

Leverage lets you control a trading position larger than the cash in your account, and margin is the slice of that cash your broker locks up as a deposit to hold the position open. They are two sides of one coin. High leverage means a small margin deposit controls a big position, which magnifies both gains and losses on the same price move.

The position sizing formula tells you how many lots to trade so that, if your stop loss is hit, you lose only a fixed, planned amount. You pick how much of your account you are willing to risk, say 1 percent. You measure the distance from your entry to your stop in pips. Then you divide your risk in money by the money value of one pip. The result is your position size in lots.

Your risk to reward ratio compares how much you stand to lose on a trade against how much you are aiming to gain. If you risk 20 pips to target 40 pips, your ratio is 1:2, meaning the potential reward is twice the size of the risk. It is one number, written risk first, and it tells you whether a trade is worth taking before you even think about whether it will work out.

A stop loss is an order that closes your trade automatically once price moves against you by a set amount, capping how much you can lose on that trade. Stop loss placement is the decision of where to put that order. Good placement is based on the price level that would prove your trade idea wrong, not on a round number or a fixed pip count.