Education

WHAT IS FOREX TRADING?

Also known as foreign exchange or currency trading, forex is one of the most traded markets in the world. In forex trading, traders hope to generate a profit by speculating on the value of one currency compared to another. This is why currencies are always traded in pairs—the value of one unit of currency doesn’t change unless it’s compared to another currency

 

Two trade opportunities

SCENARIO 1: BUY TRADE If you believe the current value of the euro is strengthening against the US dollar, you might enter a trade to buy euros in the hopes that the currency’s value will become stronger compared to the US dollar. In this scenario, you think the euro is bullish (and the US dollar is bearish).

SCENARIO 2: SELL TRADE Conversely, if you think the current value of the euro will weaken against the US dollar, you might enter a trade to sell euros in the hopes that the currency’s value will become weaker compared to the US dollar. In this scenario, you think the euro is bearish (and the US dollar is bullish).

WHAT YOU SHOULD KNOW: The buy or sell action you take to enter a trade always applies to the base currency. The opposite action automatically applies to the quote currency. So, if you buy the EUR/USD, this means you’re buying euros and selling US dollars. If you sell the EUR/USD, you’re selling euros and buying US dollars.

 

WHAT IS A PIP?

Typically in forex, currency pairs display their prices with four decimal points. A few, such as those that involve the Japanese yen, display two decimal places. No matter what currency pair you’re trading, the last large number behind the decimal always represents a pip, the main unit price that can change for the currency pair. As you trade, you’ll track your profits (or losses) in pips.

 

WHAT IS A LOT?

In forex, a lot is a standard unit of measurement. At most forex dealers, one standard lot usually equals 100,000 units of currency.

 

WHAT IS LEVERAGE?

One of the benefits of this market is the ability to trade on leverage. You don’t need $10,000 in your account to trade the EUR/USD. Currency pairs can have a leverage ratio of up to 50:1. This means you can control a large position ($10,000) with a small amount of money ($250). Many traders find the leverage that most forex dealers offer very appealing. Nonetheless, you should know that trading this way can also be risky. It can produce substantial profits as easily as it can cause substantial losses.