Forex Trading FAQ

Forex Trading FAQ

What is a pip in forex trading?

A Pip is a term you will hear a lot when talking about forex trading. It stands for “Percentage in Point”. In the forex market prices for currencies are generally quoted to four decimal points. Each 'PIP' is the fourth decimal point.

Lets say the EUR/USD rate is quoted as 1.5731 to buy (the bid price) and 1.5735 to sell (the offer price). This means that 1 Euro will buy you 1.5731 US Dollars. However if you have US dollars and want to sell to buy Euros you will only get 1 Euro for every 1.5735 dollars you sell.

In this example the spread (the difference between the bid and the offer price) is 4 pips. Therefore if you buy US Dollars at 1.5731, you will need the dollar to rice in price by more than 4 pips before you can sell at a profit (assuming the bid/offer spread remains the same.

What is Forex short for?

Forex is simply an abbreviation of the term “Foreign Exchange”. The term is used to describe the global market in which currencies are bought and sold. The Forex market is the larges and most liquid market in the world with daily volume of training thought to exceed $2 trillion.

Who Trades Forex?

Traditionally Forex trading was only really done between governments, central banks and large corporate companies however in recent years advances such as the internet has made the market much more accessible to private investors and speculators. Due to its global nature the Forex markets operate 24 hours a day, 7 days a week and unlike equity markets the Forex market is not restricted to formal exchanges or physical trading locations.

How does a Forex Trade take place?

By their nature forex trades have to legs. When you buy one currency you are automatically selling another. As a result currencies are always traded in pairs such as USD/EUR, USD/JPY etc.

The idea is to buy a currency that you expect to increase in value relative to another. In most transactions the USD is known as the base currency and prices are quoted in such a way to let you know what 1 USD will buy you off another currency. Lets look at an example: If USD/EUR is trading at 0.6354 then $1 will buy you 0.6354 Euros.

Why are there no commissions in Forex Trading?

Unlike trading Equities or stocks there is no commission to pay when trading in the Forex markets. Forex trading firms act as dealers and not brokers like in equity markets. The way they make their money is through the difference between the bid and offer prices (the spread) instead of commissions.