Lesson 4.3: Trading Basics

Understanding the basics of forex trading is essential for making informed decisions. This lesson will explain long and short positions, lot sizes, and provide an interactive activity to calculate your trade size.

1. Long vs. Short Positions

What is a Long Position?

• Definition: A long position means buying a currency pair in anticipation that its value will rise.
• Example: If you buy EUR/USD at 1.1000 and it rises to 1.1100, you make a profit from the increase.

What is a Short Position?

• Definition: A short position means selling a currency pair in anticipation that its value will fall.
• Example: If you sell USD/JPY at 110.00 and it drops to 109.50, you profit from the decrease.

Pro Tip: Use stop-loss orders to limit potential losses when taking long or short positions.

2. Understanding Lot Sizes

What is a Lot?

• Definition: A lot represents a standardized quantity of a currency pair in a forex trade.
• Types of Lots:
  1. Standard Lot: 100,000 units of the base currency.
  2. Mini Lot: 10,000 units.
  3. Micro Lot: 1,000 units.

Why Lot Sizes Matter

• Lot sizes determine your exposure in the market and influence your potential profit or loss.
• Example: A 1-pip move in a standard lot of EUR/USD is worth $10, while in a micro lot, it’s $0.10.

Pro Tip: Start with micro or mini lots as a beginner to minimize risk.

3. [Interactive Activity]: Calculate Your Trade Size

Objective: Practice calculating your trade size based on account balance, risk tolerance, and pip value.

Step 1: Define Your Risk

• Determine how much of your account balance you’re willing to risk per trade (e.g., 1–2%).

Step 2: Calculate Pip Value

• Formula: Pip value = (Lot size × pip in decimal) / exchange rate.
• Example: For EUR/USD with a 10,000-unit mini lot and a pip of 0.0001:
  • Pip value = (10,000 × 0.0001) = $1 per pip.

Step 3: Determine Trade Size

• Formula: Trade size = Risk amount / (Stop-loss distance × pip value).
• Example: If your risk is $50 and your stop-loss is 20 pips:
  • Trade size = $50 / (20 × $1) = 2.5 mini lots.

Challenge: Calculate the trade size for a $1,000 account, risking 2% with a 30-pip stop-loss on GBP/USD. Key Takeaways

• A long position means buying, while a short position means selling a currency pair.
• Lot sizes determine your trade exposure and potential profit or loss.
• Calculating trade size based on risk and pip value is crucial for effective risk management.

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