1. How Do Currency Markets Work?
By Jonathan B. Pitts
Foreign currency exchange (Forex) trading is potentially very rewarding if you know what you are doing.
It can also be extremely intimidating if you are a beginner. Before you jump in and start trading, you
need to know a little about the Forex market and how it works. We will examine how the currency
market works.
What is Foreign Currency Exchange?
The Forex market is a market for different currencies. The New York Stock Exchange is located on a
trading floor. It has a physical location you can actually visit. Forex is different. There is no trading floor
or any type of physical location. This market is all electronic. It is run by a network of banks 24 hours a
day. It opens on Sunday evening at 5:00 pm EST and closes on Friday afternoon at 4:00 pm EST. It is also
closed on some holidays. Since it is an electronic market, you can access it from your computer at your
house.
How does it work?
FOREX operates by trading different currencies. The currencies are traded in pairs. As an example,
EUR/USD has the Euro as the base currency and the US dollar as the counter currency. Forex has six
major currency pairs:
EUR/USD: Euro vs. US Dollar
GBP/USD: Great Britain Pound vs. US Dollar
USD/JPY: US Dollar vs. Japanese Yen
USD/CAD: US Dollar vs. Canadian Dollar
AUD/USD: Australian Dollar vs. US Dollar
USD/CHF: US Dollar vs. Swiss Franc
How are the Currencies Traded
The pairs are traded in lots. This is just the dollar amount of the trade. A standard account gives one lot
a value of $1,000 and it controls $100,000 in currency. This is called a standard lot. To explain this let's

2. look at an example. By placing an order buying one lot of EUR/USD, you are buying Euros and selling US
Dollars at the same time. The amount of money (margin) you have to put up to open the trade is $1000.
You are going long on the EUR. This means you expect the Euro to get stronger against the Dollar. For
each increase of $0.0001 in the Euro, you make one pip (price interest point) in this case equal to $10
per lot that you trade.
You don't have to trade in lots. There are also mini-accounts. In a mini-account, you place an order to
buy one mini-lot. This is one-tenth of a standard lot, so it is $100. In our example above, let's see what
would happen if you purchase one mini-lot of EUR/USD. For beginners, the margin requirement is only
$100.00. Each every increase in the Euro of $0.0001 you make one pip equivalent to $1 per mini-lot
traded.
The same rules above also apply to selling lots instead of buying lots. If you buy one lot of EUR/USD you
are buying Euros and selling Dollars. If you sell EUR/DOL, then you are selling Euros and buying Dollars.
How do You Make Money
When you buy a currency pair, it is referred to as going long. You are expecting the base currency to
increase in price. Each increase of $0.0001 will give you 1 pip or $10 in a standard lot. The object here is
to sell the currency pair later at a higher price than you paid for them. The difference is your profit.
When you sell a currency pair, it is called going short. In this case you expect the base currency pair to
decrease in price. Each decrease of $0.0001 will give you 1 pip or $10 in a standard lot. The point here is
to buy it later at a lower price than you sold it for. Whatever the difference is would be your profit.
Don't Forget to Pay Your Broker
In order to trade in the Forex market you have to have a broker. Broker keep the spread as their fee. The
spread is the difference between the ask and bid price. When you trade currency, you have to buy the
base currency at the asking price and sell it at the bid price. Usually the six major pairs have a low
spread. The EUR/USD is almost always two to three pips while the GPD/USD is only four to five pips.
Looking at another example, the current price of the EUR/USD is 1.2322/1.2324 (bid/ask). The EUR is the
base currency, so you can buy 1 EUR for $1.2324 USD. The bid price is 1.2322, so you can sell 1 EUR for
$1.2322 USD. The broker must be paid the spread. In this case, 1.2324 - 1.2322 = 0.0002 or 2 pips. If this
example used a standard lot, then the broker fee is $20 ($10 x 2 pips.) For a mini-lot, the fee would be
$1 x 2 pips = $2 per mini-lot. These are roundtrip trades. A round trip trade is one buy and matching sell,
or one sell and matching buy. They broker will automatically deducted their fee from your account.
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