Forex Trading

Whether you’re an individual trader or a financial or investment professional, the foreign exchange (forex) market, also known as the currency or foreign currency market, is where the money is. Forex trading amounts to approximately $5 trillion (yes, trillion, not billion) per day. By comparison, the approximately $700 billion a day bond market and $200 billion a day in stock trading worldwide appear relatively small in size. The total daily value of all the stock trading in the world equals just about one hour’s worth of trading in the forex market every day.

The forex market trades fluctuations in the exchange rate between currency pairs, such as the euro and the US dollar, which is stated as Eur/Usd. In the quoting of exchange rates, the first currency in the quotation is known as the base currency and the second currency is the quote currency. The exchange rate for a currency pair appears as a number like 1.1235. If the pair Eur/Usd is quoted as 1.1235, that means that it takes $1.12 (and 35/100th) in US dollars to equal one euro.

The most widely-traded currency pairs are, naturally enough, those involving the currencies that are most widely used worldwide – the US dollar (USD), the euro (EUR), the British pound (GBP), and the Japanese yen (JPY).

Generally, the smallest fluctuation in an exchange rate between two currencies is called a “pip”. With most currency pairs, which are quoted to four decimal places, a pip equals 0.0001. The primary exception is Japanese yen currency pairs that are only quoted to two decimal places so that a pip equals 0.01. Many brokers now quote to five decimal places, with the last number signifying a fractional 1/10th of a pip.

The value of a pip depends on both the currency pair being traded and what lot size is traded. For one standard lot, a pip commonly equals $10 (US); trading mini-lots, a pip equals $1; and trading micro-lots, a pip equals 10 cents. The value of a pip varies slightly depending on the currency pair being traded, but those figures are roughly accurate for all pairs.