Once you understand what forex trading is, the next step is learning the mechanics of a trade. Bid and ask prices, pips, lots, spreads, leverage, and margin work together. Misunderstanding any one of them can make a position riskier or more expensive than expected.
Bid price, ask price, and spread
A forex quote normally shows two prices. The bid is the price at which you can sell the base currency. The ask is the price at which you can buy it. The difference between them is the spread.
Because a buy opens at the ask and could close at the bid, a new position typically begins slightly negative by the spread amount. Spreads can change with liquidity, volatility, session, pair, broker pricing, and account type.
What is a pip?
A pip is a standardized unit used to describe a currency pair's movement. For many pairs, one pip is the fourth decimal place. A move from 1.0842 to 1.0852 is 10 pips. Yen pairs are commonly quoted differently, with a pip often represented by the second decimal place.
A pip does not have one fixed cash value. Its value depends on the currency pair, position size, exchange rate, and account currency.
What are lots and position sizes?
A lot describes trade size. Common labels include standard, mini, and micro lots, though platform conventions can vary. Larger positions cause each pip of movement to have a larger financial effect.
Position size should come from the amount you are willing to lose if the stop is reached—not from how confident a setup feels. Define the invalidation level, calculate stop distance, set account risk, and only then calculate size.
Leverage and margin
Leverage allows you to control a position with a smaller amount of account equity. Margin is the portion of funds set aside to support that leveraged position. For example, a leveraged account may require only a fraction of the position's full notional value as margin.
If account equity falls too far relative to used margin, positions may be restricted or automatically closed under the broker's rules. Read margin policies before trading, especially how the broker calculates equity, margin level, and liquidation thresholds.
Core forex order types
- Market order: requests execution at the best available price. The final fill may differ in fast conditions.
- Limit order: requests a buy below the current market or a sell above it.
- Stop entry: requests a buy above the market or a sell below it, often for breakout ideas.
- Stop-loss order: closes or reduces a position after price reaches a defined adverse level. Gaps and slippage can affect execution.
- Take-profit order: closes or reduces a position at a planned favorable level.
What does a forex broker do?
A retail broker provides account access, quotes, execution, margin, software, and reporting. Brokers can differ in legal protections, available products, pricing models, liquidity arrangements, order execution, and conflict management.
Costs may include spreads, commissions, overnight financing or swaps, conversion charges, inactivity fees, and withdrawal fees. Compare the total cost for the way you expect to trade, not one advertised spread. See the complete beginner's broker checklist.
Putting the concepts together
A trader identifies a possible EUR/USD setup and defines a stop 25 pips away. The trader decides the maximum acceptable loss first, then calculates a position size where 25 pips roughly equals that loss. The trade enters at the ask, immediately accounts for the spread, and remains subject to slippage and any financing costs if held overnight.
Frequently asked questions
What is the difference between leverage and margin?
Leverage describes the exposure relative to capital. Margin is the capital the broker sets aside to support that exposure.
Are lower spreads always better?
Lower spreads reduce one cost, but broker quality also includes regulation, commissions, execution, slippage, platform reliability, and withdrawal processes.
Can a stop loss guarantee my maximum loss?
No. A stop is an instruction to execute after a trigger price is reached. Fast movement, gaps, or limited liquidity can cause a different fill.