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How Currencies are Traded in the FOREX Market
Currencies are traded in dollar amounts called "lots". At
100:1 leverage, one lot is equal to $1000 which controls $100,000
of a given currency. This leverage is known as "margin" and some
brokers will allow traders even higher leverage than 100:1. This
superhigh leverage is one of the reasons that Forex trading has
become so popular.
Currencies are always traded in pairs. Each pair has unique
notation that expresses which currencies are being traded. The
symbol for a currency pair will always be in the form ABC/XYZ.
ABC/XYZ is not a real currency pair, just an example of how
currency pairs are stated in the market. In this particular
example, ABC is the symbol for one country's currency and XYZ is
the symbol for another country's currency.
Listed below are some common symbols used. There are symbols
for other currencies as well, but these are the most commonly
traded ones.
USD - The US Dollar
EUR - The currency of the European Union "EURO"
GBP - The British Pound
JPN - The Japanese Yen
CHF - The Swiss Franc
AUD - The Australian Dollar
CAD - The Canadian Dollar
As mentioned earlier, currencies are traded in pairs in Forex
trading. Thus, a trade always compares one currency to another in
terms of how the two currency prices will move relative to each
other. Some of the common pairs traded are:
EUR/USD Euro / US Dollar
USD/JPY US Dollar / Japanese Yen
GBP/USD British Pound / US Dollar
USD/CAD US Dollar / Canadian Dollar
AUD/USD Australian Dollar/US Dollar
USD/CHF US Dollar / Swiss Franc
EUR/JPY Euro / Japanese Yen
When you place an order to buy the EUR/USD, you are actually
buying the EUR and selling the USD. If you were to sell the pair,
you would be selling the EUR and buying the USD. So if you buy or
sell a currency pair, you are buying/selling the base currency.
You are always doing the opposite of what you did with to base
currency with the counter currency. In Forex trading, currencies
are traded on a price interest point (know as a "pip")system.
Each currency pair has its own pip value. Since we have a listed
currency pair (i.e., EUR/USD, EUR/AUD), we need a way to talk
about its associated number or price. When you see a price quote,
you'll see something listed like this:
USD/JPY: 118:51/55
The first component (before the slash) refers to the bid price
(what you obtain in JPY when you sell USD). In this example, the
bid price is 118.51. The second component (after the slash) is
used to obtain the ask price (what you have to pay in JPY if you
buy USD). In this example, the ask price is 118.55. The
difference between the bid and the ask price is referred to as
the spread. In the example above, the spread is .04 or 4
pips.
Chuck Cox is a Technical Writer and Industrial Scientist by
professional with a background in statistics. He has used
mathematical and statistical methods to invest and trade in the
stock, futures, and options markets. Chuck has owned various
businesses and presently operates several websites. To learn more
about trading the markets, visit his website, http://www.earncashathometoday.com/trading-FOREX.htm
 MORE RESOURCES updated Thu. May / 13 / 2021
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