How to trade forex
In forex trading, traders hope to generate a profit by speculating on the value of one currency compared to another.
This is why currencies are always traded in pairs - the value of one unit of currency doesn't change unless it's compared to another currency.
Currency pairs appear like this: EUR/USD. The first currency listed is the base currency. The second currency is called the quote or terms currency. A sample quote for this pair could be: 1.30381.
The base currency is always worth one. The quoted price shows how much of the quote currency you'll get for one unit of the base currency. So in this case 1 EUR is worth approximately 1.30 USD.
The last number behind the decimal - in this case 8 - represents the pip. Typically, a pip is the smallest unit price that can change for the pair. At Tradefair, we quote to the tenth of a pip. No matter what you're trading, you'll notice that the price of a currency pair moves up or down by this last decimal value.
Entering a buy position
The current price for the EUR/USD is 1.30726/745. You believe that the euro's value will rise, so you decide to enter a buy position for one lot of the EUR/USD. Because you are buying, your trade is entered at the price of 1.3041.
In this example, one lot is equal to 100,000 units of the base currency: in this case, Euros. If you are using the typical 200:1 leverage on this trade, this means that you only have to put in €500 to enter the position instead of €100,000.
Now, let's say that later in the day you look at your position and EUR/USD is now at 1.30726/745. Your trade has gained 31 pips and - since one lot is equal to €100,000 - your profit is €300:
1.30726 - 1.30416 = 31.0 pips
0.00310 x €100,000 = €310 profit
You decide to close your position at the current sell price of 1.30726 and take a profit.
Entering a sell position
Let's back up a moment and look at that scenario again. Imagine now that you believe the euro's value is going to fall. You decide to enter a sell position for one lot of EUR/USD. Because you are selling, your trade is entered at the price of 1.30383.
You check your position later in the day and discover that the EUR/USD is now at 1.30726/745. It has moved in the opposite direction you thought it would - your trade has lost 36 pips:
1.30745 - 1.30383 = 36.2 pips
0.00362 x €100,000 = €362 loss
You decide to close your position at the current buy price of 1.30745 to cover the spread and accept your loss.
Any trading scenarios shown in this material are for illustrative and educational purposes only. They should not be considered recommendations or advice. Most examples do not factor in fees and taxes. These costs will impact the outcome of your transaction.