Forex trading may seem complicated at first and some of the dynamics underlying the day to day currency fluctuations are sometimes difficult to fathom but that doesn’t mean that understanding forex trading needs to be difficult. Here are some of the Forex trading basics that will help you get to grips with trading foreign currencies.

Foreign Currency Pairs

There are always two currencies involved in a trade. They are quoted by 3 letters that stand for the currency such as USD for the American Dollar, EUR for the Euro, GBP for the British Pound, etc. The first currency quoted is the base and always has a value of 1. The price you see quoted shows how many one unit of the base currency will buy of the second currency. This may be greater than 1 for something like USDJPY as the Japanese Yen is itself quite a small unit. The fluctuations in the price between the two currencies in the pair are what drives the Forex market.

Bid and Ask Prices

Your Forex broker wants to make a profit and they do this by quoting a spread of prices. One that you buy at and the other that you sell at. The Bid price is the price you will pay if you want to buy some of the currency pair. The Ask price is the price you will get if you want to sell some of that currency pair. The gap between the two prices is known as the spread. This will vary from broker to broker. It is also different for the different currency pairs and can also vary at different times of the day and the week according to how much money is being traded at any given time. You need to take account of the spread as it will affect the margin on your trades.

Pips

Or percentage in point to give them their full name. A pip is the smallest price movement a currency pair can make. Most currency pairs are quoted to 4 decimal points so the EURUSD may be quoted at 1.3998 bid and 1.4001 ask, giving a 3 pip spread. The exception to the 4 points rule is the Japanese Yen which is only quoted to 2 decimal places but the pip spread still works by using the difference of the last decimal place quoted, so a USDJPY bid of 81.14 and an ask of 81.16 would have a pip spread.

By: Lucas Richardson

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