Forex market or foreign currency market is the biggest financial market in the world and offers trillions of dollars traded in foreign currency trading in a single day. Before entering into foreign currency market you need to understand the basics of it. It includes what is traded in the Forex market, how it is traded and what is the meaning of different terms used in foreign currency trading. Let us go over the basics of Forex trading.

foreign currency trading

What is traded in foreign currency trading market?

The instruments which are actually traded in the Forex market are different currency pairs. A currency pair consists of any two foreign currencies and the exchange rate of one currency is quoted against the other. The most common Forex trading pairs are:

  • EUR/USD
  • USD/CAD
  • GBP/USD
  • USD/JPY
  • USD/CHF
  • AUD/USD

EUR Stands for Euro, USD- US Dollars, GBP- British Pound, CAD- Canadian Dollar, JPY- Japanese Yen, and CHF- Swiss Franc. These pairs are the most common pairs and constitute around eighty-five percent of the overall volume generated in the Forex market.

The first currency in every pair is referred as the base currency and the second one is the counter or quote currency. If the price of a pair is say EUR/USD is 1.25, it means that 1.25 dollars are needed to get 1 EUR. This quote or price of every pair is not constant and keep on fluctuating over the time. This movement is the basis of Foreign currency trading and the trader buys or sells a currency in a pair with the aim of making profits.

What is bid/ask price?

Every currency pair is commonly represented with a bid/ask price. The bid price is the price at which your broker is willing to buy and thus the selling price for the trader. Just to mention, it’s very important to choose the right broker. The ask price is the price at which broker sells which is thus the buying price for the trader.

For example: EUR/USD     1.2510/15 or 1.2510/5. Here the bid price is 1.2510 and the ask price is 1.2515.

What is a Pip?

A minimum incremental move in a foreign currency trading pair is called a pip. Pip is a short form of Price interest point. For example in the EUR/USD pair a movement of 1.2121 to 1.2131 equals 10 pips. Similarly in USD/JPY the movement from 112.10 t0 113.10 mean a movement of 100 pips.

Leverage in Forex trading

Leverage is a benefit provided to a Forex trader to trade with only a margin deposit for a higher trade. For example if a broker allows 100:1 as the leverage, you need to deposit only 1 percent of the balance to open a position. Leverage gives you the opportunity to gain higher profits even if you have low money for foreign currency trading but when the trade goes against you, you will lose all your money in the deposit. Therefore leverage should be used carefully in Forex trading.