Concepts of Forex Trading.

Currency Pairs
Different currencies are priced together in pairs.


The most commonly traded currency pairs are :

· EUR/USD - Euro/Dollar
· USD/CHF - Dollar/ Swiss Franc
· USD/JPY - Dollar /Yen
· GBP/USD - Pound /Dollar
· USD/CAD - Dollar/Canadian Dollar


The first currency is called the base currency and the second currency is the qoute or counter currency.
A quote figure shows how much the base curreny is worth in the counter currency .


For example if EUR/ USD is quoted 1.023 it means that 1 Euro is worth 1.023 USD

How to Read Forex Qoutes (Bid/ Ask)
A complete quote would have two figures the bid and the ask.
The bid is the amount the broker is willing to buy the base currency in terms of the counter currency. The amount which I can sell the base currency to the broker in terms of the base currency.

The ask is the amount the broker is willing to sell the base currency in terms of the counter currency. The amount that I can buy base currency in terms of the counter currency.
A qoute is therefore made up of two figures the Bid/ and the sell.

For example
IF the ABC Forex quotes me 1.023 / 1.020 for EUR/USD

It means I can either
Buy 1 EUR from ABC for 1.023 USD
Or

Sell 1 EUR to ABC and get 1.020 USD

The above is the core to forex trading IF you do not understand the above please do not continue. Read it repeatedly if need be.
Pip
This is the smallest increment or unit of a currency quotaion. This varies from currency to currency
A pip is the last decimal place of a quotation. The PIP or POINT is how we will measure profit or losses made on trades.
Example:
If EUR/USD is quoted 1.023 the pip size is therefore 0.001.
If the value of EUR/USD moves to 1.027 the movement would hence be calculated as
1.027 – 1.023 = 0.004 = 4 Pips.

USD/JPY is quoted to two decimals e.g if USD/JPY is quoted 116.73 therefore pip size would be 0.01

Lot
This is the amount invested per trade.It may also be referred to as contract size.

The standard size for a lot is $100,000. In the last few years a mini lot size has been introduced of $10,000. Currency spot prices change in pips, which are the smallest increment of that currency.
Because these increments are tiny it is desirable to trade large amounts to get larger returns.

This is where leverage comes into the picture. What is leverage?


Leverage
Leverage is a way in which a trader can control a large market position as compared to his actual capital investement. It can be compared to trading stocks on the margin. A trader with only $100 can command a market position of $10000 using a leverage of 1:100
Mathematically leverage is the ratio of the the lot to the actual capital invested.
Typical leverage varies from 1:100 – 1:400.

Minimum capital requirements for some brokers start from $100 allowing one to trade lots of $10,000. Some brokers such as Easy-Forex allow trading with a $25 margin for lots of $10000 on a 1:400 gearing.

An early word of caution: Leverage is a double edged sword that can result in high profits or high losses.

Day Trading / Rollover
Day Trading is when a trader buys and sells his lots or stocks within a single day. He is in and out of the market that same day. He does not hold his position open overnight or for a week, etc.

The trading day ends at 3:00 pm ET. All positions that remain open after this time are considered to have rolled over to the next day. Interest is charged on all positions that are open after this time.If you are long on the currency interest is charged on your account. If you are shorting a currency the interest is credited to your account