Currency Trading Basics

What is Currency Trading?


Currency Trading is the act of buying and selling (trading) different currencies of the world. The Foreign Exchange (or Forex) is the market that allows you to trade currencies in volume. A currency trader – whether bank, corporation, or individual – must be well acquainted and skilled in the ways of the Forex market, monitoring and acting on the subtle changes that indicate the potential for profit. 


Some Currency Trading Basics - 





How to read a Quote?

Because you are always comparing one currency to another, Forex is quoted in pairs. This may seem confusing at first, but it is actually pretty straightforward. For example, the EUR/USD at 1.5011 shows how much one euro (EUR) is worth in us dollars (USD).

What is a Lot?

A lot is the smallest trade size available. FXCM accounts have a standard lot size of 1,000 units of currency. Account holders can however place trades of different sizes, so long as they are in increments of 1,000 units like, 2,000, 3,000, 15,000, 112,000 etc.

What is a Pip?

A pip is the unit you count profit or loss in. Most currency pairs, except Japanese yen pairs, are quoted to four decimal places. This fourth spot after the decimal point (at one 100th of a cent) is typically what one watches to count "pips". Every point that place in the quote moves is 1 pip of movement. For example, if the EUR/USD rises from 1.5045 to 1.5051, the EUR/USD has risen 6 pips.

What is Leverage/ Margin?

Since, all trades are executed using borrowed money. This allows you to take advantage of leverage. Leverage of 50:1 allows you to trade with $1,000 in the market by setting aside only $20 as a security deposit. This means that you can take advantage of even the smallest movements in currencies by controlling more money in the market than you have in your account. On the other hand, leverage can significantly increase your losses. Trading foreign exchange with any level of leverage may not be suitable for all investors.

The specific amount that you are required to put aside to hold a position is referred to as your margin requirement. Margin can be thought of as a good faith deposit required to maintain open positions. This is not a fee or a transaction cost, it is simply a portion of your account equity set aside and allocated as a margin deposit.

What is Bid/ Ask Spread?

It is common for any currency pair to be quoted with both a bid and an ask price. The former, which is always a lower price than the ask, is the price at which a broker is ready and willing to buy, which is the price at which the trader should sell. The ask price, on the other hand, is the price at which the broker is ready and willing to sell, meaning the trader should jump at that price and buy.

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