Quotes, spreads and the majors

The goal of every Forex trade is to swap one currency for another, betting that the one you bought will strengthen against the one you sold.

Example, buying euros:

An exchange rate is just a ratio, how much of one currency it takes to buy one unit of another.

Currencies are always quoted in pairs, GBP/USD, USD/JPY, and so on, because every transaction is a simultaneous buy of one currency and sell of the other.

Take GBP/USD = 1.7500. The currency on the left (GBP) is the base currency; the one on the right (USD) is the quote or counter currency. To buy one pound, you pay 1.7500 dollars; to sell one pound, you receive 1.7500 dollars.

You buy a pair when you expect the base currency to strengthen against the quote currency, and sell when you expect it to weaken.

Long and short, simplified: buying the pair (going long) means you want the base currency to rise so you can sell it back higher. Selling the pair (going short) means you want the base currency to fall so you can buy it back cheaper.

Every quote has two prices. The bid, always the lower number, is what the dealer will pay for the base currency, meaning it's the price at which you sell. The ask (or offer) is what the dealer will charge for it, meaning it's the price at which you buy. The gap between them is the spread, and it's how most brokers get paid instead of charging commission.

If GBP/USD is quoted 1.7445/1.7449, you sell at 1.7445 and buy at 1.7449.

Using basic fundamental reasoning (covered properly later in the course):

EUR/USD: buy if you expect U.S. weakness to lift the euro; sell if you expect U.S. strength to weigh on the euro.

USD/JPY: buy if you expect the dollar to strengthen against the yen (for instance, if Japan seems intent on weakening its own currency to help exporters); sell if Japanese capital is flowing home and pressuring the dollar.

GBP/USD: buy if UK growth looks likely to outpace the U.S.; sell if the UK is slowing while the U.S. stays strong.

USD/CHF: buy if the franc looks overvalued; sell if U.S. growth looks set to weaken the dollar.

You don't need $10,000 sitting around to trade a $10,000 position, that's what margin trading is for. Borrowed capital lets you control large positions with a small deposit, and in Forex this is measured in lots. Just as a grocery store sells eggs by the dozen rather than individually, currencies are typically traded in lots of 10,000 (mini) or 100,000 (standard) units.

Example: You buy one standard lot (100,000 units) of GBP/USD at 1.5000, controlling £100,000 (worth $150,000) for a 1% margin deposit of $1,500. The rate rises to 1.5050 and you close out, banking 50 pips, or roughly $500.

When you close a position, your original margin deposit is returned along with (or minus) your profit or loss.

Positions still open at your broker's daily cutoff (typically 5 p.m. EST) attract an overnight interest charge or credit, since every currency trade involves implicitly borrowing one currency to buy another. If the currency you bought pays more interest than the one you borrowed, you earn the difference; if it's the reverse, you pay it. Brokers vary in how they calculate and apply this, so check your broker's specific policy.

Nearly every broker offers a free demo account with full platform functionality and zero financial risk. It exists partly so you'll fall in love with the platform before depositing real money, but it's also a genuinely valuable way to learn.

A firm recommendation: spend at least three months demo trading before committing real capital. Say it out loud if it helps it stick, "I will demo trade for at least three months before I risk real money, because I am a patient and disciplined trader."