Learn Currency Trading - The Basics

Before you can really learn currency trading, you must have a good grasp of the basics. Currency trading has a few concepts that are quite strange if you haven't been involved with currency markets in the past.

Currency Pairs ( or Currency Cross )

When you look at a currency quote it looks something like this:

1.4843

This quote if for the Euro in terms of U.S. Dollars. In other words it would take a little over $1.48 to buy 1 euro. A currency pair illustrates the price of one currency in terms of the base currency. The most actively traded pair is the Euro / U.S. Dollar as there is much commerce done between the United States and Europe.

Other active pairs are:

US Dollar vs. Japanese Yen
US Dollar vs. British Pound
US Dollar vs. Swiss Franc
US Dollar vs. Canadian Dollar
US Dollar vs. Austrailian Dollar
US Dollar vs. New Zealand Dollar
Euro vs. Japanese Yen
Euro vs. British Pound
Euro vs. Swiss Franc

Since US Dollar is currently the world's reserve currency, most volume in the currency markets use the US Dollar as part of the pair.

Currency Quotes - What are Pips?

One of the strange terms you will often hear in currency trading is "Pip or Pips". This term is the same as a "Tick" in other forms of trading, it is the smallest price movement. So if the price of the Euro moves from 1.4947 to 1.4848 it has moved up 1 pip. Most price platforms will even show 1/2 pips in that case there will be two extra digits at the end that is either a 50 or 00.

Here is an example of a currency quote:

This is the standard quote system. It's a little hard to see but part of the quote is smaller and in red 149 and the next two digits ( the pips ) are shown in larger font - 47 and the 1/2 pip is smaller again 00 and 50

This looks a little strange, but it's the same as:  1.4947

The quote on the left is the "Bid" and the quote on the right is the "Ask".   If you want to sell the euro the best price you can currently get is $1.4947.  If you want to buy the Euro, the best price someone will sell at is 1/2 pip higher than the bid price.

The white numbers below the price show the amount that is available at that price quote, so you could sell up to 16,000,000 euros at that bid price or buy 2,000,000 euros at the current ask price.  The spread between the two is extremely close on the Euro, however it depends upon market conditions and where you are trading.  1/2 pip is the closest the bid/ask spread can possibly be.

If you bought 20,000 euros and immediately changed your mind and sold you would lose 1/2 pip or $1 (plus commissions) even though the price didn't move.  That's why you want to make sure the spread is narrow on the markets you trade.

Learn To Track The Price Trend