Forex trading 101: Delving into currency pairs and pips

Julie Brownlee, Fsp Invest, 05 Aug. 2015

Tags: forex, currency pairs, pips, forex trading, trading forex,

If you want to start forex trading, the first thing you need to do is get to grips with the basics.

Forex trading is all about trading different currencies or foreign exchange. You always trade currencies in pairs and you measure price movements in pips.

Let’s take a closer look at how this works…

Trading the forex market

The forex market is a multitrillion dollar market. Unlike stock exchanges, the forex market starts trading early on a Monday morning and doesn’t stop until late on a Friday evening.

This means you can trade forex 24 hours a day, five days a week. Trading starts in the east each day and moves west until it all starts over again.

You can decide whether to trade the rand against a number of different currencies or to trade other currencies including the likes of the US dollar, the euro and the pound.

Currencies trade in pairs

Unlike trading shares where you decide on one specific company, when you trade forex, you trade currencies in pairs. For example, the US dollar against the rand or the euro against the yen.

This means you determine the value of one currency by comparing it to another currency.

Each time you put a forex trade on, you’re simultaneously buying one currency and selling another.

What pips mean when you trade forex

Pips are the smallest price movement a currency price can make. When you look at currency quotes, you’ll usually find these are to four decimal places. For example, USD/ZAR 12.7897.

One exception to this general rule is the yen. Yen quotes are to two decimal places.

The movement in pips determines your profits or losses when you trade forex. For example, if USD/ZAR moves from 12.7897 to 12.7900, that’s a three pip move.

So there you have it. Delving into currency pairs and pips.

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