Learn to Trade Forex – 3. How to Trade Forex | Swissquote

A currency trade is a decision to buy or
sell a currency. When you trade Forex, you trade one currency for another. Since
their value is rarely one-to-one, the currency amounts are different: this
reflects the exchange rate. Any two currencies involved in a Forex trade are
called the currency pair. The value of the first currency, the base currency, is
shown in terms of the other currency. The base currency is what you buy or sell,
and the quote currency shows how much you will pay or receive. For example
you want to sell 10000 euro for some US dollars. Your trading platform will show
the currency pair and the price. The price is the amount of the quote
currency that you will receive when you sell 10,000 of the base currency. Forex
markets enable you to trade any two currencies in the world. The currency
pairs traded most often are called the major currency pairs. Other currency
pairs are called minor or emerging currency pairs. In trading, profit is made
by buying low and selling high and that happens in forex, too – the difference
between the buy price and the sale price is called the spread. The spread is
measured not in whole dollars or pounds but in so called pips. This is the
smallest possible price change on most trading platforms. For most currency
pairs, this is the fourth number after the decimal point. The monetary value of
each pip depends on three factors: the currency pair being traded, the size of
the trade, and the exchange rate. A very liquid currency pair often has tight
spreads of only a few pips, whereas less liquid currencies have larger spreads.
Since the profit or loss is so small for each currency unit traded, many trades
are very large. For example say that you believe that the euro will rise if you
buy 1000 euro by selling US Dollars and sell them again once the euro has risen
10%, you will make 110 US dollars of profit.
Similarly if you buy 1 million euros against US dollars on a 10 percent rise,
you would make 110 thousand US dollars profit. To achieve this result, traders
often use margin accounts to leverage or borrow money that enables them to make
such large market orders. This concludes the overview of how to trade Forex, what
a currency pair is, definitions of spread and pip and why forex market
participants use leverage.

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