The exchange rate represents how much of the quote currency is needed to buy 1 unit of the base currency. As a result, the base currency is always expressed as 1 unit while the quote currency varies based on the current market and how much is needed to buy 1 unit of the base currency.

Similar to stock traders, forex traders are attempting to buy currencies whose values they think will increase relative to other currencies or to get rid of currencies whose purchasing power they anticipate will decrease. There are three different ways to trade forex, which will accommodate traders with varying goals: The spot market. This is the primary forex market where those currency pairs are swapped and exchange rates are determined in real-time, based on supply and demand. The forward market.

Instead of executing a trade now, forex traders can also enter into a binding private contract with another trader and lock in an exchange rate for an agreed upon amount of currency on a future date. The futures market. Similarly, traders can opt for a standardized contract to buy or sell a predetermined amount of a currency at a specific exchange rate at a date in the future. This is done on an exchange rather than privately, like the forwards market. The forward and futures markets are primarily used by forex traders who want to speculate or hedge against future price changes in a currency.

Forex Terms to Know Each market has its own language. These are words to know before engaging in forex trading: Currency pair. All forex trades involve a currency pair. In addition to the majors, there also are less common trades like exotics, which are currencies of developing countries. Short for percentage in points, a pip refers to the smallest possible price change within a currency pair.

Because forex prices are quoted out to at least four decimal places, a pip is equal to 0. Bid-ask spread. As with other assets like stocks , exchange rates are determined by the maximum amount that buyers are willing to pay for a currency the bid and the minimum amount that sellers require to sell the ask.

The difference between these two amounts, and the value trades ultimately will get executed at, is the bid-ask spread. The typical lot size is , units of currency, though there are micro 1, and mini 10, lots available for trading, too. This procedure allows for profit even when the bid and ask don't move at all, as long as there are traders who are willing to take market prices.

It normally involves establishing and liquidating a position quickly, usually within minutes or even seconds. The role of a scalper is actually the role of market makers or specialists who are to maintain the liquidity and order flow of a product of a market. The profit for each transaction is based only on a few bips basis points , so scalping is typically conducted when there are large amounts of capital and high leverage or there are currency pairs where the bid—offer spread is narrow.

The numerical difference between the bid and ask prices is referred to as the spread between them. The ask prices are immediate execution market prices for quick buyers ask takers ; bid prices for quick sellers bid takers. The spread can be viewed as trading bonuses or costs according to different parties and different strategies.

On one hand, traders who do not wish to queue their order, instead paying the market price, pay the spreads costs. On the other hand, traders who wish to queue and wait for execution receive the spreads bonuses. Some day trading strategies attempt to capture the spread as additional, or even the only, profits for successful trades. Lower exposure, lower risks — Scalpers are only exposed in a relatively short period, as they do not hold positions overnight.

As the period one holds decreases, the chances of running into extreme adverse movements, causing huge losses, decreases. Smaller moves, easier to obtain — A change in price results from imbalance of buying and selling powers. Most of the time within a day, prices stay stable, moving within a small range.

This means neither buying nor selling power control the situation. There are only a few times which price moves towards one direction, i. It requires bigger imbalances for bigger price changes. It is what scalpers look for — capturing smaller moves which happen most of the time, as opposed to larger ones. Large volume, adding profits up — Since the profit obtained per share or contract is very small due to its target of spread, they need to trade large in order to add up the profits.

Scalping is not suitable for large-capital traders seeking to move large volumes at once, but for small-capital traders seeking to move smaller volumes more often. Different parties and spreads[ edit ] Whenever the spread is made one or more party must pay it paying the cost to receive some value on completing the transaction quickly and some party or parties will receive that money as profit.

Who pays the spreads costs [ edit ] The following traders pay the spreads: Momentum traders on technicals — These traders look for fast movements hinted from quotes , prices and volumes, charts. When a real breakout occurs, price becomes volatile.

A sudden rise or fall may occur within any second. They need to get in quick before the price moves out of the base. Momentum traders on news — When news breaks out, the price becomes very volatile as many people watching the news will react at more or less the same time.

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