Forex Trading Basics – Understanding Currency Pairs
If you are just learning forex trading basics there are some fundamental concepts that you should be familiar with before you can start trading. Of course, you know that currency trading involves buying and selling currency pairs. Trading currency pairs means simultaneously buying a certain amount of currency while selling the equivalent amount of another. Because of this, you can think of a currency pair as a single unit. One example of a currency pair is EUR/USD (the Euro & the US dollar). When you buy this currency pair you are actually buying the base currency (in this case the Euro) while selling the quote currency (the US dollar). When you sell a currency pair, the opposite happens.
Forex Trading Basics – Trading Currency Pairs
The most traded currencies in the forex market are the US dollar (USD), the Euro (EUR), the UK pound (UKP), the Swiss Franc (CHF), the Japanese Yen (JPY), the Australian Dollar/New Zealand dollar (AUD/NZD), the Canadian dollar (CAD) and the South African Rand (ZAR). The most traded pairs are the EUR/USD, USD/CHF, GBP/USD and USD/JPY. Less popular are pairs like the USD/CAD, NZD/USD and the AUD/USD. Collectively, only eighteen currency pairs are actively traded on the market; this accounts for the pairs enumerated above, along with their various permutations, accounting for some 95% of all trading in the market.
Forex Trading Basics – Reading Currency Quotes
Understanding currency quotes might be a little confusing at first if you’re not used to reading them. The quote gives information such as the currencies being traded, the bid price and the ask price. The bid price is the price that it will cost you to buy a currency pair while the ask price is the price you will receive if you sell a pair. The ask price is also the price of the currency pair when you close your order.
Forex Trading Basics – The Spread
The difference between the bid and ask prices is called the spread and is how your broker makes money on your trades made through his network. For example, the bid price or buying price might be 1.3605 and the ask price or selling price is 1.3597. The spread is thus 0.0008, or eight pips. Pips are the smallest price movement of a particular exchange rate and are generally the equivalent of 1/100th of one percent. The broker automatically deducts the spread during your trades such that by the time you close your position, you’ve already paid it.
Forex Trading Basics – Buying in Lots
When you trade forex, you never buy just a single unit or even small amounts. Since exchange rates increase in extremely small increments, a large amount of currency will have to be traded in order for the trader to realize any substantial profits. Because of this, the typical lot is 100,000 units of a currency. However, in order to make forex trading more accessible, many currency brokers now offer mini-lots of 10,000 units. These mini-lots are a great way for beginner traders to reduce the risks associated with currency trading while they still learning how to trade.