Currency trading on the foreign exchange (forex) market is fairly easy these days with three types of accounts designed for retail investors: standard lots, mini lots and micro lots. Beginners can start a micro account for as little as $50.
Before you start jumping, you should familiarize yourself with the forex market and market terminology,and if you’ve already done stock trading online, it should be easy to get started.
Forex stands for Foreign Exchange which means foreign exchange or currency trading from different countries with ever-changing values over time.
Please note that the Forex Market is the world’s largest liquidity market with daily transaction vouchers reaching over 2 trillion US dollars. The volume of Forex transactions is much greater than the daily transactions of the New York stock exchange which are only 25 billion U.S. dollars. What is the question of what is traded on Forex exchanges? The answer, of course, is money that became a trading commodity that was originally solely as a mechanism for overseas payments between countries.
Here is a list of Forex Trading terms that you should learn.
PIP : The smallest price change that can be given the exchange rate. Since most major currency pairs are priced at four decimal places, the smallest change is the last decimal point. A common exception is for japanese yen (JPY) pairs quoted to the second decimal point.
BASE CURRENCY : The first currency quoted in a currency pair in forex. It is also usually considered a domestic currency or accounting currency.
CROSS CURRENCY PAIR : A pair of currencies traded in forex trading excluding U.S. dollars One foreign currency is traded for another without having to first exchange its currency for American dollars.
CURRENCY PAIR : The quotation structure and price of currencies traded on the forex market: the value of the currency is determined by its comparison with other currencies. The first currency of the currency pair is called “base currency”, and the second currency is called “quote currency”. The currency pair shows how many quote currencies it takes to buy a single unit of base currency.
QUOTE CURRENCY : The second currency quoted in a currency pair in forex trading. In direct quotations, the quote currency is a foreign currency. In indirect quotations, the quote currency is the domestic currency. This is also known as “secondary currency” or “counter currency”.
Now that we’ve reviewed the basic terminology, let’s take a look at some of the differences between trading stocks versus currencies. In currency trading you always compare one currency to another so forex is always quoted in pairs. Sometimes the authors of the currency study refer only to half of the currency pairs. For example if an article refers to trading euros (EUR) at 1.3332, it is assumed the other currency is the U.S. dollar (USD).
When looking at the quote screen for the first time, it may seem confusing at first, but it’s actually very easy. Here is an example of EUR/USD Quote.
Examples of quotes show traders how much one euro is worth in US dollars). The first currency in the currency pair is the “base currency” and the second currency is the “opposing currency” or secondary currency.
When buying or selling currency pairs, such actions are being taken on the base currency.
For example a bearish trader on the euro, can sell EUR / USD. Well, when selling EUR / USD, traders not only sell euros but also buy US dollars at the same time. Thus trade pairs.
Let’s say you sell EUR/USD at 1.4022. If EUR/USD falls, that means the euro is weakening and the U.S. dollar is strengthening. You may also notice the offer price has four places to the right of decimal. Currencies are quoted in pips. Pip is the unit you use to calculate profit or loss. Most currency pairs, except the Japanese yen pair, are quoted into four decimal places. The fourth place after the decimal point (at 100 cents) is usually what the trader sees to calculate “pips”.
Each point entered in the moving quote is 1 pip of movement. For example, if GBP/USD rises from 1.5022 to 1.5027, GBP/USD has increased by 5 pips.
Now depending on the lot size (standard, mini, micro) the value of pip money may vary according to the size of your trading and the currency you are trading in.
The most common lot size is trading with an additional 10,000 (mini). A size of 10,000 for EUR/USD costs $1.00 per lot. If you trade 3 lots or 30,000, each pip is worth $3 in profit or loss. The full size, or standard lot, is 100,000 where each pip is worth $10, and the micro lot size is 1,000, each pip is worth $0.10.
Some currency pairs will have different pip values. Be sure to check with your broker.
One of the nice things about currency trading is that there are no commissions. Looking at the quote picture above, note the small number of pips between the two quoted currencies: the price difference is 2.5.
This is known as its spread. The spread is how brokers make money and act similarly to bid/ask in stock trading. Not all spreads are created equal. The spread differs between brokers and sometimes time can cause volumes to be light and spreads to increase in some brokers.