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Perhaps you're wondering how foreign currency trading works? At its simplest, trading foreign currency involves two currencies traded simultaneously, called a “pair”. For example, the EUR/USD Forex Pair trade the Euro against the US Dollar. In this example, a buyer of this Forex Pair would be “buying” the Euro and “selling” the US Dollar. Fundamentally, Foreign Currency Trading couldn't be simpler. As you're able to access the Forex Market from the comfort of home, office, laptop, or any other location with internet access, and at any time of the day or night, any day of the week, you now have your finger on the pulse of superb financial potential.

Forex pairs are described in the following format: XXX/YYY. The First half of the Currency pair is represented by XXX, and is called the “Base Currency”. The second half of the Forex Trading Pair is represented here by YYY, and is called the “Counter Currency”. Prices are always expressed in terms of the counter currency, which you now know is the second half of the pair equation. Now that you're familiar with how a Forex pair is represented, it will be simple to understand in terms of euro and dollar denominations, or any other currencies represented.

Examples always seem more meaningful when we can grasp their significance to our pocketbooks. For example, in this Forex pair, the current price of the EUR/USD is represented as 1.3667. This would mean that 1 Euro (the Base Currency in the Forex Pair) equals 1.3667 US Dollars. Remember that the price of a currency pair is always expressed in terms of the Counter Currency. In this example, the Counter Currency is the USD, the second half of the equation. Are you beginning to calculate possible profits? But let's not get ahead of ourselves. We're still discussing how currency pairs are represented in the Forex markets.

You may now be wondering if all pairs in the Forex markets are represented equally. Good question. Most major pairs are priced to 4 decimals, or 1/100th of one percent. Yes, there is an exception to this rule; the Japanese Yen, which trades only to 2 decimals. This is because there're approximately 100 Yen to the dollar. So this pair will undoubtedly appear a bit different in the final analysis, but still represents the same potential for gain as any other foreign currency pair.

Let's examine how the Japanese Yen expresses when traded with the US Dollar as the base currency. In this instance, the USD/JPY pair, the price is expressed in Japanese Yen. If the current price of the Forex Pair is 108.02, this means that the base currency, the US Dollar, equals 108.02 Japanese Yen, the Counter Currency.

Now that you understand how currency pairs are represented, we can explain further how Forex prices are expressed. In the Forex markets, you'll quickly begin to understand that a pip is the minimum increment that a currency pair price can change. For example, if the EUR/USD pair price changes from 1.3790 to 1.3791, the prices is said to have gone up by 1 pip. With multiple currencies represented in the foreign currency markets, and the Yen providing a bit of variation, having a standardised term to represent incremental fluctuations in pricing is essential. Imagine how all those pips in your pocketbook will feel when you begin to trade profitably.

Let's look at Forex pairs in more depth now that you've got the hang of it. The price of a pair is based on quotes which are represented on a “Bid-Ask” basis. So what, exactly, does this mean? The “Bid” is the price that the market is willing to pay a seller for a pair at a specific point in time. The “Ask” is the price that the market is willing to sell to a buyer at that same point in time. Again, another equation is being used to express how currency pairs are priced. The difference between the “Bid” and the “Ask” is called the “Bid/Ask Spread”.

Prices are always listed as “Bid” price first, “Ask” price second. One veteran trader simplified it further for trading dummies like me; “Bid, please”. That helped me remember that the price of the Bid comes first, the price of the Ask (please) is expressed second. It is essential to understand this simple sequence in order to grasp the basics. To express the Bid/Ask in terms of something you might put in that pocketbook of yours, let's look at another example of Forex pricing. Here we have a typical EUR/USD quote, which might be 1.3784 Bid / 1.3787 Ask in which case the quote price is said to have a spread of 3 pips. Now let's examine what the “Spread” represents in the Bid/Ask of the markets.

Now that you're really beginning to grasp the basics, you'll much more easily comprehend the spread. In Forex trading, The Spread is how Forex market makers are compensated, as opposed to “commissions” paid for trading stocks or options. When trading the Forex, the spread can and will vary depending upon a number of factors, including but not limited to; current Forex Market conditions, the specific broker or market maker you use (some do charge higher spreads than others), and the currency pair being traded (more thinly traded currencies often have higher spreads).

To put a bit of jingle in our demonstration, let's turn those pips into Euros and Dollars. In the currency pair EUR/USD example above, the quote would be expressed simply as 1.3784/1.3787 or 1.3784/87. Simplification is exemplified in the second expression of the example. Do you feel more confident to try your hand at Forex trading now that you know more about currency pairs, pips, Spreads and Pricing?

Now that we've simplified and condensed our view of trading the Forex markets by examining some of the basics, let's step back again and look at the broader picture. Let's envision where our Forex pairs gather and multiply. Much like buying shares of stock, Forex trades in “Lots”. There are different types of lots including, standard, mini and micro. Yes it sounds like we're describing garments, and like garments there's a “Lot” to fit each trader.

So let's look more closely at our Lots. A Standard lot trades 100,000 units of a Forex currency pair. Mini lots trade 10,000 units of pair, and micro lots trade 1,000 units. The Lot you choose will be determined by your individual circumstances and how many pips are in your pocketbook, and how many you're willing to commit to the Forex markets. In our example where our pair was EUR/USD, expressed as 1.3784/87, buying this pair in a Standard Lot would mean buying 100,000 Euros and selling short 137,870 US Dollars.

Now that you're armed with some basic knowledge of the market, remember to use good judgment when investing. The market and the potential for financial gain is available nearly 24 hours a day, 7 days a week practically globally and essentially on demand. So it's vital you be as well informed about the global economy as possible. Be a well informed and responsible Forex trader, and you too may begin to see profits multiply.

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