Forex trading always involves selling one currency in order to buy another. 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 in the above example, GBP is the base currency and USD is 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.
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The decimal places shown after the pip are called fractional pips, or sometimes pipettes. 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.
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A standard lot is , units of currency. Alternatively, you can sometimes trade mini lots and micro lots, worth 10, and 1, units respectively.
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Leverage allows you to open a position without having 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: Remember that CFDs are a leveraged product and can result in losses that exceed your deposits.
Trading CFDs may not be suitable for everyone, so please ensure that you fully understand the risks involved. IG is a trading name of IG Markets Ltd and IG Markets South Africa Limited. International accounts are offered by IG Markets Limited in the UK FCA Number , a juristic representative of IG Markets South Africa Limited FSP No South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.
Such trades are not on exchange. CFDs are a leveraged product and can result in losses that exceed deposits. Personal Logout My IG.
Create account Login Menu Menu. Forex costs and details Forex Direct What is forex trading How does forex trading work How to trade forex with IG. Access to over 15, markets. How does forex trading work? When you open a forex position, you are buying one currency while simultaneously selling another. Read on for a detailed look at how a forex trade works: Currency pairs Forex trading always involves selling one currency in order to buy another.
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. Pips When a forex pair increases or decreases in price, that movement is measured in units called pips.
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