View more search results. Forex trading works by simultaneously buying one currency while selling another. If the currency you have bought increases in value against the currency you have sold, you can close your position for a profit.
If not, you make a loss. For this reason, they are quoted in pairs that show which currency is being bought and which is being sold. Each currency in the pair is listed in the form of its three letter code, which tends to be formed of two letters that stand for the region, and one standing for the currency itself.
In this pair, you are buying pound sterling by selling US dollars. The first currency listed in a forex pair is called the base currency, and the second currency is called the quote currency. The price of a forex pair is how much one unit of the base currency is worth in the quote currency. So if you think that the base currency in a pair is likely to strengthen against the quote currency, you can buy the pair going long. If you think it will weaken, you can sell the pair going short.
If you want to open a long position, you trade at the buy price, which is slightly above the market price. If you want to open a short position, you trade at the sell price — slightly below the market price. When a forex pair increases or decreases in price, that movement is measured in units called pips. A pip is usually equivalent to a one-digit movement in the fourth decimal place of a currency pair. The exception to this rule is when the quote currency is listed in much smaller denominations, with the most notable example being the Japanese yen.
Here, a movement in the second decimal place constitutes a single pip. Leverage allows you to get exposure to large amounts of currency without having to commit too much capital. A single pip is a very small unit of movement, and while forex pairs tend to be very volatile they often move in relatively minor increments. For this reason, forex traders will either have to trade large batches known as lots, or take advantage of leverage.
A standard lot is , units of currency. Alternatively, you can sometimes trade mini lots and micro lots, worth 10, and 1, units respectively. Leverage allows you to open a position without have to pay its full value upfront. When you close a leveraged position, the profit or loss is based on the full size of the trade. While that does offer a chance of higher profits, it also brings the risk of amplified losses: Spread bets and CFDs are leveraged products and can result in losses that exceed deposits.
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How does forex trading work? What are currency pairs? Base and quote currency The first currency listed in a forex pair is called the base currency, and the second currency is called the quote currency. The spread The spread is the difference between the buy and sell prices quoted for a forex pair. Find out more about the spread.
The decimal places shown after the pip are called fractional pips, or sometimes pipettes. What is leverage in forex? What is a lot? The benefits of leveraged trading Leverage allows you to open a position without have to pay its full value upfront.
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