Trading currency in the foreign exchange market
(forex) is fairly easy today with three types of accounts
designed for retail investors: standard lot, mini lots and micro
lots. Beginners can get started with a micro account for as
little as $50.
Before you start jumping in you should familiarize themselves
with the market and terminology of the forex market, and if
you've already been trading stocks online it should be easy to
Below is a list of terms you should learn.
The smallest price change that a given exchange rate can
make. Since most major currency pairs are priced to four decimal
places, the smallest change is that of the last decimal point. A
common exception is for Japanese yen (JPY) pairs which are quoted
to the second decimal point.
The first currency quoted in a currency pair on forex. It is also
typically considered the domestic currency or accounting
CROSS CURRENCY PAIR:
A pair of currencies traded in forex that does not include the
U.S. dollar. One foreign currency is traded for another without
having to first exchange the currencies into American
The quotation and pricing structure of the currencies traded in
the forex market: the value of a currency is determined by its
comparison to another currency. The first currency of a currency
pair is called the "base currency", and the second currency is
called the "quote currency". The currency pair shows how much of
the quote currency is needed to purchase one unit of the base
The second currency quoted in a currency pair in forex. In a
direct quote, the quote currency is the foreign currency. In an
indirect quote, the quote currency is the domestic currency. This
is also known as the "secondary currency" or "counter
Now that we've reviewed basic terminology, let's look at some
of the differences between trading stocks vs. currencies. In
currency trading you are always comparing one currency to another
so forex is always quoted in pairs. Sometimes authors of currency
research will refer to only one half of the currency pair. For
example if an article is referring to the euro (EUR) trading at
1.3332 it's assumed the other currency is the U.S. dollar
When looking at the quote screen for the first time it may
seem confusing at first, however, it's actually very
straightforward. Below is an example of a EUR/USD quote.
The quote example shows traders how much one euro is worth in
US dollars). The first currency in a currency pair is the "base
currency" and the second currency is the "counter currency" or
When buying or selling a currency pair, the action is being
performing on the base currency.
For example traders bearish on euros, could sell EUR/USD. Now,
when selling EUR/USD, the trader is not only selling euros but is
also buying US dollars at the same time. Thus the pair trade.
Let's say that you sell the EUR/USD at 1.4022. If the EUR/USD
falls, that means the euro is getting weaker and the U.S. dollar
is getting stronger. You might have also noticed the quote price
has four places to the right of the decimal. Currencies are
quoted in pips. 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 traders watch to count
Every point that place in the quote moves is 1 pip of
movement. For example, if the GBP/USD rises from 1.5022 to
1.5027, the GBP/USD has risen 5 pips.
Now depending on the lot size (standard, mini, micro) the
monetary value of a pip can vary according to the size of your
trade and the currency you are trading.
The most common lot size is to trade in increments of 10,000
(mini). A lot size of 10,000 for the EUR/USD is worth $1.00 per
lot. If you were trading 3 lots or 30,000, each pip is worth $3
in profit or loss. A full size lot, or standard lot, is 100,000
where each pip is worth $10, and a micro lot size is 1,000, were
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 trading currencies is there is no
commissions. Looking at the quote image above, notice the small
number of pips between the two quoted currencies: the difference
in prices is 2.5.
This is known as the spread. The spread is how the broker
makes their money and acts similar to the bid/ask in stock
trading. Not all spreads are created equal. The spread differs
between brokers and sometime the time of day can cause volume to
be light and the spread to increase at some brokers.