Currency trading operates 24 hours a day except weekends and involves trading between different currency pairs during overlapping trading sessions centered around European, Asian, and US markets. Currency is traded in micro, mini and standard lots where the lot size determines the monetary value of each pip. The major currency pairs that are most actively traded involve the US dollar, euro, British pound, Japanese yen and others, though there are over 180 available pairs.

1. MECHANICS OF CURRENCY DEALING
Currency trading is a 24-hour market that is only closed from Friday evening to Sunday
evening, but the 24-hour trading sessions are misleading. There are three sessions that include
the European, Asian and United States trading sessions. Although there is some overlap in the
sessions, the main currencies in each market are traded mostly during thosemarket hours. This
means that certain currency pairs will have more volume during certain sessions. Traders who
stay with pairs based on the dollar will find the most volume in the U.S. trading session.
Currency is traded in various sized lots. The micro lot is 1,000 units of a currency. If your
account is funded in U.S. dollars, a micro lot represents $1,000 of your base currency, the
dollar. A mini lot is 10,000 units of your base currency and a standard lot is 100,000 units.
Pairs and Pips
All currency trading is done in pairs. Unlike the stock market, where you can buy or sell a
single stock, youhave to buy one currency and sell another currency in the forex market. Next,
nearly all currencies are priced out to the fourth decimal point. A pip or percentage in point, is
the smallest increment of trade. One pip typically equals 1/100 of 1%.
Retail or beginning traders often trade currency in micro lots, because one pip in a micro lot
represents only a 10 cents move in the price. This makes losses easier to manage if a trade
doesn'tproducethe intended results. In a mini lot, one pip equals $1 and that same one pip in
a standard lot equals $10. Some currencies move as much as 100 pips or more in a single
trading session making the potential losses to the small investor much more manageable by
trading in micro or mini lots.
Far Less Products
The majority of the volume in currency trading is confined to only 18 currency pairs compared
to the thousands of stocks that are available in the global equity markets. Although there are
other traded pairs outside of the 18, the eight currencies most often traded are the U.S. dollar
(USD), Canadian dollar (CAD), euro (EUR), British pound (GBP), Swiss franc (CHF), New
Zealand dollar (NZD), Australian dollar (AUD) and the Japanese yen (JPY). Although nobody
would say that currency trading is easy, having far less trading options makes trade and
portfolio management an easier task.
Moves Currency
An increasing amount ofstocktraders are taking interest in the currency markets becausemany
of the forces that move the stock market also move the currency market. One of the largest is
supply and demand. When the world needs more dollars, the value of the dollar increases and
when there are too many circulating, the price drops.
Other factors like interest rates, new economic data from the largest countries and geopolitical
tensions, are just a few of the events that may affect currency prices.

2. The Bottom Line
Much like anything in the investing market, learning aboutcurrency trading is easy but finding
the winning trading strategies takes a lot ofpractice. Mostforex brokers will allow youto open
a free virtual account that allows you to trade with virtual money until you find strategies that
work for you.
EXCHANGE RATE
An exchange rate (also known as a foreign-exchange rate, forex rate, ER, FX rate) between
two currencies is the rate at which one currency will be exchanged for another. It is also
regarded as the value of one country’s currency in terms of another currency. For example, an
interbank exchange rate of 119 Japanese yen (JPY, ¥)to the United States dollar (US$) means
that ¥119 will be exchanged for each US$1 or that US$1 will be exchanged for each ¥119. In
this case it is said that the price of a dollar in terms of yen is ¥119, or equivalently that the
price of a yen in terms of dollars is $1/119.
Exchange rates are determined in the foreign exchange market, which is open to a wide range
of different types of buyers and sellers, and where currency trading is continuous: 24 hours a
day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday. The
spotexchange rate refers to the current exchange rate. The forward exchange rate refers to an
exchange rate that is quoted and traded today but fordelivery and payment on a specific future
date.
In the retail currency exchange market, different buying and selling rates will be quoted by
money dealers. Most trades are to or from the local currency. The buying rate is the rate at
which money dealers will buy foreign currency, and the selling rate is the rate at which they
will sell that currency. The quoted rates will incorporate an allowance for a dealer's margin (or
profit) in trading, or else the margin may be recovered in the form of a commission or in some
other way. Different rates may also be quoted for cash (usually notes only), a documentary
form (suchas traveller’s cheques) orelectronically (such as a credit card purchase). Thehigher
rate on documentary transactions has been justified as compensating for the additional time
and costofclearing the document. On the other hand, cashis available for resale immediately,
but brings security, storage, and transportation costs, and the costoftying up capital in a stock
of banknotes (bills).
EXCHANGE RATE QUOTATION
In the foreign exchange market, a currency pair is the quotation of the relative value of a
currency unit against the unit ofanother currency. The quotation EUR/USD 1.3225 means that
1 Euro will buy 1.3225 US dollars. In other words, this is the price of a unit of Euro in US
dollars. Here, EUR is called the "Fixed currency", while USD is called the "Variable
currency".
There is a market convention that determines which is the fixed currency and which is the
variable currency. In most parts of the world, the order is: EUR – GBP – AUD – NZD – USD
– others. Accordingly, in a conversion from EUR to AUD, EUR is the fixed currency, AUD

3. is the variable currency and the exchange rate indicates how many Australian dollars would
be paid or received for 1 Euro. Cyprus and Malta, which were quoted as the base to the USD
and others, were recently removed from this list when they joined the Eurozone.
In some areas of Europe and in the retail market in the United Kingdom, EUR and GBP are
reversed so that GBP is quoted as the fixed currency to the euro. In order to determine which
is the fixed currency when neither currency is on the above list (i.e. both are "other"), market
convention is to use the fixed currency which gives an exchange rate greater than 1.000. This
reduces rounding issues and the need to use excessive numbers of decimal places. There are
some exceptions to this rule: for example, the Japanese often quote their currency as the base
to other currencies.
Quotation using a country's home currency as the price currency (for example, EUR 0.8989 =
USD 1.00 in the Eurozone, USD/INR = 45.30 Rs. / 1$) is known as direct quotation or price
quotation and is used in most countries.
Quotation using a country's home currency as the unit currency (for example, USD 1.11 =
EUR 1.00 in the Eurozone, INR/USD = 0.0220 $ / Rs. 1) is known as indirect quotation or
quantity quotation and is used in British newspapers; it is also common in Australia, New
Zealand and the Eurozone.
USD is the most widely traded currency and is often used as the vehicle currency. This helps
in reduction of no. of quotes in the market, as exchange rate between two currencies can be
determined through their quotes against the USD. Any quote not against the USD is a Cross
Quote. Availability of USD quotefor all currencies can helping determining the exchange rate
for any pair of currencies by using the cross rate. For e.g. Cross quote for EUR-GBP
=EUR/USD * USD/GBP9.
Using direct quotation, if the home currency is strengthening then the exchange rate number
decreases. Conversely, if the foreign currency is strengthening and the home currency is
depreciating, the exchange rate number increases.
Market convention from the early 1980s to 2006 was that most currency pairs were quoted to
four decimal places for spottransactions and up to six decimal places for forward outrights or
swaps. An exception to this was exchange rates with a value of less than 1.000 which were
usually quoted to five or six decimal places. Although there is no fixed rule, exchange rates
numerically greater than around 20 were usually quoted to three decimal places and exchange
rates greater than 80 were quoted to two decimal places. Currencies over 5000 were usually
quoted with no decimal places (for example, the former Turkish Lira). e.g. (GBPOMR:
0.765432 -: 1.4436 – EUR JPY: 165.29). In other words, quotes are given with five digits.
Where rates are below 1, quotes frequently include five decimal places.
In 2005, Barclays Capital broke with convention by quoting spotexchange rates with five or
six decimal places on their electronic dealing platform. The contraction of spreads (the
difference between the bid and ask rates) arguably necessitated finer pricing and gave the
banks the ability to try and win transactions on multibank trading platforms where all banks
may otherwise have been quoting the same price. A number ofother banks have now followed
this system.