To put the above ideas in actual instance, let us say your observation and analysis brings you to think that the Euro will further go up against the U.S. dollar and you want to buy Euros in exchange for U.S. dollars, expecting the former to appreciate. You may elect to open a lot (100,000) and buy the Euros with it at a margin of 1%. If the exchange rate for EUR/USD is 1.25, you will in effect be buying 100,000 Euros at a price of 125,000 U.S. dollars. Since the margin is 1%, then the amount to be set aside in your account is 1% of 125,000, which is US$1,250. This means that your $US1,250 made you in control of 100,000 Euros. If your analysis is correct and the euro appreciated over the dollar, let us say, to 1.2550, then you will have earned 50 pips or $500. A pip is the tiniest price movement in a currency and more about this will be discussed in the next chapter. Should you decide to close the position, the deposit you previously made will go back to you and profits or losses you made will be credited to your account after calculations.

It is worthy to note that positions that are still open by the broker’s cut-off time equate to a rollover interest, which the trader will either pay or earn depending on his position. A borrowed currency would entail the trader to pay interest and a bought currency earns a trader interest. The cut-off time is usually at 5:00pm, Eastern Saving Time (EST). It would be better to close the account before the end of the trading day in order for the trader not to earn or pay interests. Your broker/dealer may be able to give you the specific details you need to know regarding rollover. Many brokers adjust their rates (rollover rates) depending on factors such as lending rates and account leverage. It would also be helpful for you to know that each currency is designated its own rate. U.S. dollar rate is .25%, Euros are 2%, Australian dollars are 4.25%, Japanese Yen are 0.10%, Swiss Francs are 0.5%, Canadian dollars are 1%, New Zealand dollars are 5% and the British Pounds are 1.5%.

If is highly advisable that traders do not go into trading with real money immediately. They may do some practicing by opening a demo account first before delving into the real world of forex. This demo account is free and allows the new trader to gain the full capabilities of a real account. Brokers offer these demo accounts for free to lure them to love the trade and eventually open a real account with them. It favors the brokers in terms of advertisement but it also favors the new trader since he manages to learn the ins and outs of forex trading without the actual risk. Any forex trading expert would advise a new trader to make use of these demo accounts before the real thing.

Another set of words to be remembered when trading currencies are the words “bid” and “ask.” The dealer’s “bid” is actually the price he is willing to pay to buy the base currency in exchange of the quote currency. It therefore means that the bid is the amount at which you will sell. On the other hand, the “ask” is the dealer’s price at which he will sell the base currency for the quote currency. The “ask” therefore is the amount at which you will buy. The difference between the two is called the “spread.” If you already start forex trading, you will see how user-friendly this bid and ask process is as formatted by the forex trading. All the trader needs to do is click on the icons when he decides to either bid or ask or buy or sell and he is well on his way to the next transaction.

Now one would ask where he/she will base what currencies to buy or sell. Forex trading is not a game of cards wherein a lot is based on luck. Decisions on whether to buy or sell currencies are based largely on what is happening in the economies of the nation where the currency involved came from. It also depends on many factors that have direct or indirect effects on a nation’s economy. It is therefore important to be aware of what is going on and be vigilant of updates and news around the world, or at least of the news about the country whose currency you want to trade with. It is wiser however to generally have a knowledge of what is going on in the world for what happens in one country may have a domino effect and thereby affect other countries. The current recession for example is not limited to certain nations only, but the whole world.

To illustrate again, let us use USD/JPY this time. The base currency in this example is the U.S. dollar and the quote currency is the Japanese yen. The U.S. dollar therefore is the basis for the buy and sell. It is important for the trader to study the current economic situations of these countries to wisely make the move of either buying or selling. If you, as the trader, think that the Japanese yen is going to weaken since the Japanese export industry needs help, then it would be a wise move to execute a BUY USD/JPY order. This means buying the dollars thinking that the value will appreciate over the yen. If, however, your analysis brought you to thinking that the Japanese investors are taking money from the U.S. market and turning the dollars into yen, thereby hurting the U.S. dollar, then you should execute a SELL USD/JPY order. This means selling your dollars expecting that the yen’s value will go down.

For new traders who have a capital that is not too big and want to buy currencies, but do not have enough money, is trading still possible for them? The answer is yes. This could be done via margin trading. Simply put, margin trading is trading with the use of borrowed capital. It is trading on credit. It is through this technique that a trader with as little as $1,000 can open positions worth $10,000 to $100,000. Margin trading is quantified according to “lots” in the forex market. A “lot” is the minimum price of the currency you need to buy. In forex trading, it is not usual to talk retail, as in buying 1 dollar or selling 1 euro. Forex transactions are done in “lots.” To analogize, you do not buy a couple of grapes, you buy them in bunches. We do not usually buy one or two eggs; we buy them by the dozen. That is how you will use a “lot” in forex. Depending on the account you have, a lot is 10,000 for a mini account and 100,000 for a standard account.

For those with experience in trading the stocks or futures, forex trading will be easy to understand. It is basically the buying or selling of currencies. The main goal in forex trading is to exchange or buy one currency for another currency, with the expectation that the price of the currency you bought or exchanged will have an increased value compared to the currency you sold or exchanged it with. That is how you make money from forex trading.

To illustrate, let us say for example that you bought 100,000 Euros at the EUR/USD exchange rate of 1.20. Then after a week, you exchange back those 100,000 Euros to dollar, this time at an increased rate of 1.25. EUR100,000 multiplied by 1.20 is US$120,000 and EUR100,000 multiplied by 1.25 is US$125,000. The difference between the two is your profit. If millions instead of hundreds of thousands are involved, then bigger profits are earned. Both rates 1.20 and 1.25 are the ratios of one currency over the other. Using the same example, it simply means that 1 euro can purchase 1.2 or 1.25 US dollars. This is just an example and it does not mean that these are the actual and present exchange rates of the two currencies.

You may ask why currencies are always quoted in pairs. This is because in every forex transaction, you buy one currency the very same time that you are selling another. Let us use another illustration, considering the sample “forex quote” we used above, EUR/USD=1.2500. The euro in this equation is called the “base currency.” The US dollar on the other hand is the “counter or quote currency.” If you will buy a currency given this example, the exchange rate dictates how much you need to pay in units of the quote currency (which is the dollar in this example) to purchase one unit of the base currency (the euro in this case). Therefore, you have to pay 1.25 U.S. dollars to purchase 1 euro. If you will be selling, the same principle applies. Only this time, again using the same example, the exchange rate dictates how many units of the quote currency (dollar) you will get if you will sell one unit of the base currency (euro). This means that you will have 1.25 U.S. dollars for every euro you sell.

The basis for buying and selling in a forex trading market is the “base currency.” If you say you will buy EUR/USD, it means you are buying the base currency (euro) and at the same time selling the quote currency (dollar). The base currency is also the basis of the trader’s movement in forex. If he thinks the base currency in a pair will go up, then it is a wise move to buy the pair. If, on the other hand, he thinks that the base currency will go down, then it is wise to sell the pair.

In forex trading lingo, two of the most important words to remember are “long” and “short.” “Long” and “buy,” as well as “short” and “sell” are respective synonyms. When you buy, it is already in your mind and in your expectation that the base currency will rise in value so that you could, in turn, sell it at a higher price. This is what the traders call taking a “long position” or “going long.” If selling, you expect the base currency to depreciate so that you could buy it back at a lower price. This now is what is called by traders as a “short position” or going short.