Forex Currency Basics

Forex trading is currently the global trend in investing. Proof of this is that fact that the Forex trading is a US$1.5 trillion industry per day industry.

If you plan on investing in Forex trading, you need to know the basics and acquire a fundamental understanding on how it works.

One constant in Forex trading is that two currencies are always working against each other in a single trade: the base currency and the variable currency. The base currency is the currency in which an investor buys or sells. This is indicated as the first currency in a pair, i.e., the USD in USDJPY. The variable currency, meanwhile, is the currency that is being used to buy the currency.

A normal Forex trading transaction always begins and ends with the base currency. If, for example, an investor wants to trade in EURUSD, he will be quoted a bid (selling) price and ask (buying) price for the Euro in US dollars.

An investor profits from a Forex trading transaction if, for example, he bought one Euro for $0.9879 and sells it at $0.9895. Profit is not much at just one Euro, but if an investor buys and sells a fixed amount of, say, 1,000,000 Euros, then the profit is felt.

Forex trading attracts many investors, not just because of the potential profit, but also because of leveraging. An investor does not actually have to have the equivalent 1,000,000 Euros in his account just to buy that much Euros, he only has to have 1/100th of the equivalent amount at the buying price.

Investors in Forex trading have, historically, greatly benefited from a declining base currency, which then swings into strength against the variable currency.

Some important terms to remember in Forex trading are "spread" and "pips."

Spread is the difference between the selling price and the buying price of a currency. A pip, on the other hand, is smallest unit of the difference between the bid and the ask price. If for example, there is a .0003 difference in the bid and ask price of the Euro in a EURUSD trade, then the difference is three pips.

A pip is easily calculated, if you know in how many decimals a variable currency is quoted. A dollar is quoted in four decimals while the yen is quoted in two decimals. Just take out the zeros before the numbers, i.e., take out the three zeroes before the three.

Of course, knowing about spread and pips will not necessarily rake in the profits for you. Getting a feel on the right time to buy or sell is actually the more important knowledge in Forex trading.