Understanding the basics of the forex markets is crucial information that all traders interested in day trading forex currency should know.
The forex market is open virtually 24/7 through market makers, major banks, and brokerage houses around the world. With an average daily turnover in the trillions of dollars it is the largest financial network in the world.
And as more and more traders move away from stocks and into foreign currency trading the forex market is only getting bigger.
The the most basic level, day trading forex currency is composed of a trading a "pair" of currencies at the same time. E.g. You might trade the Australian Dollar against the US Dollar, shortened to AUS/USD. If you were the buyer of this pair you would be buying the Australian Dollar and selling the US Dollar.
As you have just seen, we describe forex pairs using the format -- YYY/ZZZ.
The first currency, YYY, is known as the base currency. The second currency, ZZZ, is known as the counter currency. We always talk about prices in terms of the counter currency.
Lets take a look at a quick example:
If 0.8349 is the current price of the AUS/USD pair, then that means 1 Australian Dollar (which is the base currency) is equal to $0.8349 US Dollars.
All of the major pairs other than the Yen are priced to four decimal places. The Yen is only priced to two decimal places because there are more than 100 Yen to the Dollar.
Forex prices are talked about in terms of "pips". One pip represents the smallest increment a currency pair price can change. E.g. If the AUS/USD prices goes from 0.8349 to 0.8350, then it has gone up by one pip.
We quote forex pairs on a bid-ask basis. The price the market is willing to pay a seller for a specific currency pair at a specific point in time is known as the bid. The price the market is willing to sell a specific currency pair to a buyer at a specific point in time is known as the ask. And the difference between the two is known as the bid/ask spread.
We always list forex prices with the bid price first and the ask price second. E.g. A quote for AUS/USD might be 0.8332 // 0.8335, where 0.8332 is the bid price and 0.8335 is the ask price. In this case the spread is 3 pips.
Unlike the stock market, where commissions are paid, when you are day trading forex currency the market makers make their money from the spread.
There are many factors which influence the spread, including your broker (some have higher spreads), particular market conditions, and the specific currency pair traded.
In our AUS/USD example used above, instead of writing "0.8332 // 0.8335" you would express the quote simply as 0.8332/5.
Forex trades in "lots" similar to the stock market, and you can trade in a variety of lots, including: micro, mini and standard.
Micro lots trade 1,000 units. Mini lots trade 10,000 units. And standard lots trade 100,000 units.
Taking a real life example, if you were to buy a mini lot of AUS/USD with a quote of 0.8332/5, then you would be buying 10,000 Australian Dollars and short selling 8,335 US Dollars.
If you can grasp these basic principles you're not only ahead of most amateur traders, but you're well on your way to understanding the systems used for day trading forex currency.
