Trading In Foreign Exchange Explained In Simple Terms

The ability to trade with margins is one of the reasons of the immense popularity of trading in foreign exchange. Margin trading or leverage means that a trader can take a large position with a small capital outlay, which increases the profit potential manifold. However, it works both ways as it increases the potential for loss as well.

Trade in foreign exchange is basically done in currency pairs. The quoted rate reflects the value of one currency as compared to the other in the pair. For example, if EUR/AUD is being quoted at 1.23, it means that one euro is equal to 1.23 Australian dollars. The base currency is always the one that is listed first in the pair. What is interesting in the foreign exchange market is that both bull and bear market are always present at any given pointy in time. This is because you are primarily betting on which currency will increase in value as compared to the other. If you are bullish on one, you are bearish on the other.

Traders in foreign exchange can take advantage no matter which way they think the market will move in future as they have the option of going long or short in a currency pair. The minimum movement in foreign exchange rates is known as a pip. In case of AUD against the US dollar this would be the fourth decimal place. Suppose AUD/USD is quoting at 1.70 and you were to buy 10,000 units. If the price moves up by 0.01, it would mean that you make a profit of $1.