Forex traders buy and sell currency pairs on the assumption that they will make money as the value of one currency increases relative to the other. The first currency listed in a currency pair is referred to as the base currency, and from the quote you would understand that one unit of the base currency is equal to a multiple, or fraction, of the second.
So, if you wanted to buy euros on the assumption that they will appreciate relative to the U.S. dollar, you would buy the EUR/USD currency pair (see "Trade the majors," below). A euro price quote of 1.3803/06 indicates that you could sell the euro for USD 1.3803, or buy it for USD 1.3806. If you wanted to buy Canadian dollars on the assumption that they will appreciate relative to the U.S. dollar, you would sell the USD/CAD. A CAD price quote of 1.0538/43 indicates that you could sell one USD for $1.0538 Canadian. Or buy one USD for $1.0543 Canadian.
The pip spread is how the forex dealer profits in lieu of an exchange fee. A pip is the smallest increment of price movement, and is equal to $10 on a $100,000 transaction for most pairs. A pip spread is demonstrated in the price quote, and is the difference between the bid and the offer: the difference between 1.3803 and 1.3806 is .0003, or three pips. On the major currency pairs, typical commissions are between two and five pips. Make certain you understand how your dealer charges you before you place your trades and then figure that into your entry and exit targets.
If the U.S. dollar is not part of the quote, you are looking at a “cross pair.” Although the most liquid currency pairs include the U.S. dollar, cross pairs such as the EUR/JPY or EUR/GBP are becoming quite liquid. Trading cross pairs is an advanced technique and can be quite expensive, as both of the currencies will need to be converted into U.S. dollars and you will be charged for multiple transactions. As a beginner, you should limit yourself to the majors. More data is available for them and they are more liquid, meaning you will be able to get out of a trade without slippage. Get good at trading the majors and managing your risk before you consider trading cross pairs.
One of the reasons that forex trading has become so popular with retail traders is that they can take larger positions based on the margin requirements, and it's not unusual to see firms offering leverage of 100 to 1, and even 400 to 1. In the forex world, margin is the minimum dollar amount required in your trading account to place a trade, and it is more similar to futures margin than stock margin, as it is based on risk. That's great when you are right early and often, but with that kind of leverage, it is not difficult to bankrupt an account before a trading strategy has a chance to prove its worth. Every trader and trading strategy has its ups and downs, and your account shouldn't rest on the performance of only a couple of trades. Make certain you understand the basics of risk management before putting on any trade.
Many forex brokers offer mini lots for new traders and those with smaller trading accounts, and after you spend months doing simulated trading, you should probably start with mini lots until you understand the market, what moves it, how it moves and when.
