How to trade

A currency pair symbolizes the exchange rate between the two currencies. Take the EUR/USD rate, for example, it represents the number of US Dollars one Euro may purchase. Currencies are always quoted in pairs. The first currency is the base currency and is the foundation for the buy or the sell; the second currency is the counter currency. The Bid (sell) price is the position at which a trader can sell the currency pair. The Ask (buy) price is the level at which a forex trader may buy the currency pair.

Margins and Lot sizes

Margins allow you to place trades much larger in size than your investment. Margin levels range from 50:1 to 200:1, depending upon the account. Remember, without proper risk management, this high degree of leverage can lead to large losses as well as gains. For example, with $1000 you can take up to $200,000 in positions. All trades are carried out in "lots" of a minimum size. Lot sizes are either 10,000 or 100,000 units of base currency, depending on the account type.

The spread

The forex market spread is the difference between the bid rate and the ask rate. When a trader enters upon a position, the spread will automatically be deducted. The traders position will have to gain a profit equal to the amount of the spread just in order to break even.

Trade Example

When you buy EUR/USD, you are buying Euros and simultaneously selling US Dollars. You would do this if you expect the Euro to increase in value compared to the US dollar. Let's look at sample EUR/USD forex trade on a 100K Account:
You buy one EUR/USD lot at: 1.3553
The Euro rises in value and you sell at 1.3674

That is an increase of 121 pips. One pip in a $100k account equals $10. That's a profit of $1,210.