This article covers the basic concept of forex trading and foreign exchange rate quotes.
If you wish to make money in this financial market, you need to learn everything about the mechanics of the market. You have to obtain forex training, be able to read quotes, know how to place order and develop your own trading strategy.
Trading Lot Sizes
A lot size in a standard trading account is equal to 100,000 units of currency. You have the facility to operate through a mini account where the size of a lot is equivalent to 10,000 currency units. The amounts may seem huge, but the small movements in values need that you have these large amounts to show a bigger profit.
What are Pips and Spreads?
The spread is the amount your forex broker earns as income. It is the difference between the ask and the bid prices in your foreign exchange rate quote. If your forex broker was to provide you with a quote that states USD/AUD=1.0300/05, the spread would be the smallest movement between the two prices which in this case is five pips. This is the variance between 1.0300 and 1.0305. This may appear to be a small amount of movement, but in the forex market, you are offered high leverage which could turn those small movements into huge profits.
A pip is normally the last decimal point in your quotes. Your quotes will normally work to the fourth decimal for all major currency pairs, other than the Japanese yen which is quoted to two decimal places. This means that for the yen, a pip is equal to 0.01.
Direct vs. Indirect Quotes
The quotes you receive will either be direct or indirect. With a direct quote, the base currency is normally the foreign currency. With an indirect quote the base currency is normally the domestic currency. For example, you are based in Australia which means that the domestic currency is the Australian dollar. If you were to obtain a direct quote, it would include a variable amount of the Aussie dollar for a fixed amount of the foreign currency. In the event that you obtained a quote which stated AUD1.0300 per USD1, you would have been issued with a direct quote. In the event that you obtain a quote which reads AUD1=USD0.97, you have been given an indirect quote.
Cross Currency Foreign Exchange Rate Pairs
Any foreign exchange rate quote that does not indicate the US dollar as part of the pair is called a cross currency quote. The most popular of these quotes include EUR/CFH, EUR/JPY and EUR/GBP. The cross currency pairs do not hold the same popularity as the ones including the US dollar. They do however increase the available currency pair choices for traders. If you make the choice to trade cross currency pairs, it is vital that you keep up to date on events in the countries linked to your currency pair. You will also have to review the times you trade as currency pairs do not experience the same level of trade throughout the trading day. This is particularly true if you are trading a cross currency pair.