Understanding Foreign Currency Trading: The Basics

When you are just starting out, foreign currency trading may seem overwhelmingly complicated. Just trying to understand the dynamics behind the daily currency fluctuations can take several years.

The good news is, you don’t have to get into such a detailed understanding of currency fluctuations to be successful in forex currency trading.

I’ve put together a few of the most basic concepts that you need to know as a forex trader. 

foreign currency trading

Once you have a good understanding of the basics, you can then build on it by experience as well as by reading some more about the different terms and principles. These two main foreign currency trading basics that I’ve put together will help you enter the forex market more confidently.

Understanding Foreign Currency Pairs
& How They Work

The forex market is all about trading in foreign currencies. There are always two different currencies that are involved in any trade. Each of these currencies is denoted by 3 fixed letters.

The United States Dollar is denoted as USD, the British Pound as GBP, the Japanese Yen is JPY and the Euro is EUR. Of course, there are many more. I’ve just mentioned some of the few that are most commonly traded. 

The first currency that you see quoted is considered as the base currency. The base always has a value of one. The second price that you see quoted tells you how many of the second currency you can purchase with one unit of the  base currency.

This second quoted price could be higher or lower than the base price depending on the currency pairs. In a USDJPY pairing, the value will be greater than one as the Japanese Yen is a smaller unit.

However in a USDGBP pairing the value will be less than one. The constant fluctuations in the values between the two currencies in the pair are what drive the Forex market.

Understanding Bid & Ask Prices

couple trying to understand bids at laptop

Your forex broker will typically quote what is called a ‘spread of prices’ – one that you will purchase at and the other that you will sell at. The bid price is what it will cost you to buy some of the currency pair.

The ask price is what you will get when you decide you want to sell some of that currency pair.

The difference or the ‘gap’ between the two prices is called to the spread. The spread varies not just from one broker to another but also for different currency pairs.

Moreover, the spread can also vary at different times of the day and week, depending on the amount of money being traded at that given time. When trading, it pays to keep an eye on the spread as it plays an influencing role on the margin on your trades.

If you need some more help with understanding foreign currency trading or any other terms or principles of forex trading, get in touch with me and I’d be glad to help you. The more you know about how it works, the better your chances of success.

As a newbie to the forex market, I would also urge you to read about forex managed accounts as they can often be a good way to get started with making a profit while you are still finding your way around.

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