So you are a beginner and you want to learn how to trade currency on the foreign exchange market? The process of forex currency trading appears very straight forward however the beginner will require serious further study to be able to trade successfully. You should always take the time to carefully consider the basics before you get started.

In the beginning forex currency traders will need to learn the basic concepts and terms that will help them in their currency trading process. For the beginner this may seem a little confusing but it's really fairly simple. The beginner should also have a basic understanding of how to calculate a profit. The more familiar you are with the forex basics the easier it is for the beginner to get started in forex currency trading.

Currency Pairs: Every currency has a three letter abbreviation. The currency rates are always quoted in pairs and expressed as a five digit number. The first currency in the pair is the base currency and it is always equal to 1. The base currency is the currency you intend to purchase. The second currency in the pair is the counter currency and is the currency you intend to use to purchase the base currency. The price for the currency pair is expressed in terms of the counter currency. For example, if EUR/USD = 1.4100 then every 1 Euro is worth US $1.41.

Pips: currencies are traded on a price interest point (pip) system. The last digit in the currency pair represents one pip. For example if the GBP/USD rate moved from 1.6374 to 1.6375 this represents one pip movement. It also means that the GBP has appreciated by one point and the USD has depreciated by one point. Each currency has its own pip value. Similarly if the USD/JPY rate moved from 130.45 to 130.46 it has appreciated by one pip.

Pip Value: In any currency pair in which the USD is the counter currency, the currency pair has a pip value of $1 per every 10,000 currency units. Therefore for every 100,000 currency units one pip will equal $10.

Bid/Ask Price: The 'bid' price is shown at the left side of the quotation and is the price at which the trader can sell the base currency. The 'ask' price is shown at the right side of the quotation and is the price at which the trader can buy the base currency. For example EUR/USD is 1.4426/1.4428

Bid/Ask Spread: The spread is the difference between the bid and ask price for every currency pair. The lower the spread the lower the broker's fees. Forex traders are subject to spreads when opening or closing trades in the buying position. In other words, you are always subject to a spread when you buy, regardless of whether you are opening or closing the trade. The narrowest spreads are quoted on the most liquid currency pairs, the majors.

Margin: The beginner needs to understand that forex currency trading is conducted on margin. This means that you only need to use a small cash deposit to trade a much larger amount of currency. The margin deposit is required as collateral to cover any losses that might be incurred. For example a broker might require only $1,000 in your trading account in order to trade a $100,000 trading position. In effect the broker loans you $99,000 for $1,000 in security.

Lot Sizes: Trading is done in lots, either standard lots or mini lots. A standard lot size is equivalent to 100,000 units of currency. Forex brokers offer leverage to trade lots, for example with 100:1 leverage (and when USD is the base currency in the pair) you will need $1,000 of margin deposit to trade one standard lot. A mini lot size is 10,000 units of currency, with 200:1 leverage you will need $50 to trade one lot.

Rollover: When a trader has an open position at 5.00pm EST it will automatically be rolled over to the next day resulting in your trading account to either earn daily interest or pay daily interest. This is determined by the 'interest rate differential' which is the difference between the short-term interest rates of the two economies comprised in the currency pair.

For example, a trader who buys GBP/USD would need to borrow the Dollars to buy the Pounds and will, thus pay interest on the USD and earn it on the GBP. Hence if Britains interest rates are 5.0% and U.S. interest rates are 2.0%, you would earn interest at a net rate of 3.0% per year. If you initially sell GBP/USD you would have to pay interest at 3.0% per year. 

Carry Trade: the purpose is to earn extra income from the daily interest payments when you hold on to a currency pair. Selection of the right currency pair is essential for this to work. You will need to buy the currency with the higher interest rate and sell the currency with the lower interest rate. However, unless there is a significant difference between the two interest rates, the net profit or loss will be marginal. While interest rates are set on an annual basis and trading positions are usually opened for short periods will significantly lower any gain or loss on interest rates.

Cross Currencies: currency pairs that do not involve the U.S. Dollar.

Long Position: occurs when a trader initially buys currency with the expectation that the currency will increase in price and then selling it later at a higher price.

Short Position: occurs when a trader initially sells currency with the expectation that the currency will decrease in price and then buying it back later at a cheaper price.

How to Trade Currency
Illustrated below for the beginner is an example of how to calculate a profit in forex currency trading.

Say for example you believe that the Euro will appreciate in value against the US Dollar in the near future and the current exchange rate is EUR/USD = 1.4210. You then decide to buy 100,000 Euros (1 standard lot).

EUR 1.00 = USD 1.4210
100,000 x 1.4210
Your purchase of 100,000 Euros is US $142,100

At 100:1 leverage your required margin deposit is $1,421

Profit
Later on, as expected, the Euro appreciates by 75 pips to EUR/USD = 1.4285. You then decide to sell your Euros and exchange them back into US Dollars.

                                       EUR 1.00 = USD 1.4285
                                       100,000 x 1.4285

                                       You will get: US $142,850

                                       Your profit = ($142,850 - $142,100) = $750


When starting out with forex currency trading it's a good idea to begin with some lower amounts until you have figured out exactly what you're doing as it can be difficult for most beginners. You can always increase the amounts once you gain the experience and skills necessary to make larger trades successfully.

It is also beneficial to take some time to decide what currency pair or pairs you want to trade with. Generally no more than 2 to begin with to allow you ample opportunity to learn how the pairs actually relate to each other and ensure you are able to clearly identify the patterns that they follow. Beginners can increase to more pairs once they have a firm grasp of the basics of forex currency trading.