How Is Currency Traded?

Investing in currencies is similar to investing in stocks. When you purchase stock in a company, you are buying ownership in the value of the company. When you trade currency, you are simply investing in the economy of a certain country.

Forex Margin Accounts

Currency trading is done through what is called a margin account. A margin account is set up through forex brokers who will place your trade on the interbank network and oversees your account. A margin account is like a bond account that works similar to a savings account. These margin accounts insure that you get paid when you exit a profitable trade and insure the banks and other traders that you can pay when you lose on a trade. Brokers also monitor your account equity and insure that you do not risk more on a trade than you have in an account.

Types of Forex Accounts

There are 3 different types of forex accounts offered by brokers when setting up your forex trading account.

• Forex Micro Account
• Forex Mini Account
• Forex Standard Account

Each account has different funding requirements and leverage. Each also produces different risk reward ratios. Fore more information on the types of accounts, please click on the links above.

Lots and Leverage

Currency trading is done buy purchasing lots through your margin account. Trading 1 lot is sort of like trading 1 share of stock in a company other than in forex a lot has a fixed amount of money that it is worth at the moment you buy or sell it. A lot is a pre determined amount of currency that a bank allows you to trade based on your margin account. For example, if you are trading (1) lot on a standard account, you are typically trading 100,000 US dollars worth of currency with a leverage of 1:100. In other words 1 lot = control of 100,000 US dollars. By entering a trade buying 1 lot, $1000 US dollars is set aside in your margin account allowing you to control 100,000 US dollars worth of the currency you are trading. If you are trading on a mini forex account, 100 US dollars allows you to control 10,000 US Dollars worth of a currency at 100:1 leverage. This leverage is part of the reason that trading currency is so appealing to many forex traders.

What Is A Pip?

A pip or Point Interest Spread, is the term used in the currency market to represent the smallest incremental move an exchange rate can make. Depending on context, normally one basis point (0.0001 in the case of EUR/USD, GBD/USD, USD/CHF and .01 in the case of USD/JPY). Why is this important? Pips are how forex traders get paid! If you are trading 100,000 US dollars worth of a currency, and the value of that currency goes up by 1 pip or , 100000 x 1.0001 = $10 for the trader.