Forex Trading - Basic Concepts

Forex trading or currency trading is the simultaneous buying or selling of one currency and selling or buying of another currency. The most important currencies that are traded are: Euro (EUR), US dollar (USD), British Pound(GBP), Japanese Yen (JPY), Canadian dollar (CAD), Australian dollar (AUD) and the Swiss Frank (CHF). These currencies are traded on the Forex market in currency pairs. For example: EUR/USD, USD/CHF, GBP/USD, USD/JPY, USD/CAD, EUR/JPY, etc.

The first currency in the currency pair is called the base currency and is always dominant. For example, when the EUR/USD is bought at 1,5000, this means that you have bought the Euro at 1,5000 and simultaneously sold the Dollar at 1,5000.

How much is 1 pip?

Pip (percentage in point) means one hundredth of one percent and represents the smallest fraction at which Forex currency rate combinations can change. Calculations are made to 4 decimals, except for the Yen pairs where 2 decimals are used.

The EUR/USD rate, for example, is 1,50 Dollar for one Euro but 1.5001. The rate can then move to 1.5002 or 1.5000. Or the rate of the USD/JPY pair is 110.12 and can move up or down to 110.13 or 110.11.

What is the value of 1 pip?

For an account in Euro, this depends on the value pair that is traded and the current value of this pair. This is, for example, EUR10/pip for 1 standard contract EUR/USD (100,000 units), when the value of the EUR/USD = 1.

For an account in dollars, the pip value for currency trading in EUR/USD, GBP/USD and the AUD/USD always remains equal to $10/pip for 1 standard contract. As our base currency is the Euro, we will obviously be opening an account in Euro at a Forex broker. This can be done both in the US as well as in Europe.

How many pips can the rate move up or down in 1 day?

This depends primarily of the currency pair, but to give a typical example: for the EUR/USD this is + or - 110 pips/day. If you were to trade a standard contract and you earn 110 pips at C10/pip, this will mean a profit of C1100. The reverse is also true of course if you were to lose 110 pips.

If you were to trade a mini contract and you earn 110 pips at C1/pip this would make you a profit of C110. The reverse also holds true of course if you were to lose 110 pips.

If you were to trade a micro contract and you earn 110 pips at C0.1/pip, this would mean a profit of C11. The reverse is true if you were to lose 110 pips.

What are the existing Forex contracts?

Micro contract/micro lot: 1000 units -- one hundredth of a standard contract/lot

Mini contract/mini lot: 10,000 units -- one tenth of a standard contract/lot

Standard contract/standard lot: 100,000 units

P.S. Most Forex brokers offer mini and standard contracts.

What is the maximum contract/lot size that can be executed per transaction?

Most forex brokers limit the size of their contracts per transaction to 100 standard lots. In the example above, this would mean a profit of EUR110,000 at 110 pips!

A helping hand in the currency market?

Currently there are trading platforms that are only intended for trading currency pairs on the Internet. There are also various Forex software packages available to anyone wishing to automate the entire process. As you can imagine, there are many advantages to be gained from being able to follow several currency rates simultaneously and having Forex software help you make sense of it all.

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One thing is certain, the currency market is vast, very active and it will be around for