What is forex trading?

Forex is short for Foreign Exchange.  Trading Forex is buying one currency with another currency.  Since the currency of a particular country is akin to the shares of a company, it’s like trading the stock of a country.

Currency pairs

Since you are buying one currency with another the prices are quoted in Currency pairs. The base currency is the first in the pair with the second currency as the quote currency.  While the trade is  an exchange of 2 currencies, the base currency  can be thought of as what is being bought or sold.  This is because the figure provided shows how much of the quote currency would be exchanged for 1 unit of the base currency.  For example, EURUSD price of 1.6 means that you can trade  1 EURO for 1.6 USD

Pips

A pip is the smallest amount that  the  quote price of a currency can change.  For currencies with USD It is typically 1/100 of 1% which is $0.0001.

Spreads

The bid/ask spread is the cost of trading in the forex market and is measured in pips.  The broker increases the price of the currency to make their profit and usually around 1-3 pips for major currency pairs.

Leverage.

Leverage is the ability to use a small deposit to complete a larger total trade.  Brokers can offer leverage ratios of 100:1 or even more.   A ratio of 100 to one means that with $100 you can trade $10,000 lots.  This amplifies gains but also equally amplifies losses.

This is the only time we will break from the minimalist info to tell you that it is generally a really bad idea to trade more than 3:1 or 4:1.  Almost all of the risk, stupidity and scary things you hear about the losses in the forex market is due to leveraging more than you should.

Lots

Lots are the amounts that are traded.  Quoted in the base currency, typical lot sizes are 100,000 units of the base currency.

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