What Does FOREX Trade Mean?

The question, what does FOREX trade mean can have many answers.

That’s because a FOREX trade has a lot of different moving parts to it, and it’s not easy to understand for new foreign currency traders.

So, let’s have a look at several of the more important parts that make up a FOREX trade. For those of you brand new to FOREX trading, what does FOREX trade mean is a good question.

So, what is FOREX trading all about?
Its' parts are somewhat like a puzzle, and not always easy to understand initially. The following are the specific parts of a FOREX trade we will cover here:

- FOREX Currency Pairs
- FOREX Contract Size
- FOREX Pair Price Quotes
- FOREX Base Currency & Quoted Currency
- FOREX Bid/Ask
- FOREX PIPS

First off, let's try to eliminate some of the confusion about exactly what is forex trade called. Understand the FOREX market goes by many similar names, all of which are used very interchangeably by foreign currency traders.

(Those other names for the FOREX market include Foreign Currency market, FOREX currency market, Foreign Exchange Currency market, Foreign Exchange trading, Currency Trading, Foreign Currency market, Currency Trading market, 4x Market, 4x Currency market, 4x trading or just 4x/4X, or the Foreign Exchange market).

If you are really brand new to currency trading, check out our suggestions for forex trading for beginners first.

For the purpose of this discussion here though, we’ll answer the question of what does FOREX trade mean by focusing on trading (speculating) for profit in the FOREX markets…..and cover several of the key components making up a typical FOREX or foreign exchange currency trade.

FOREX Currency Pairs

This could be the US Dollar and Japanese Yen (USD/JPY). It could be the British Pound and Canadian Dollar (GBP/CAN). Maybe you have interest in trading the Australian Dollar (AUS/EUR). Or, it could be any of several other foreign currency pairs.

A major difference when trading commodity futures contracts besides FOREX - - - is that you are only trading one commodity (like Coffee, Orange Juice or Pork Bellies).

And, in that case, you trade one futures commodity either long (expecting the market to rise), or short (expecting the market to fall).

Trading FOREX currencies adds another dimension over trading other Commodity Futures, because unlike other commodity futures, you are trading a pair of commodities - - - or two foreign currencies.

And, unlike other commodity futures where you are either buying or selling a futures contract…..in foreign currency trading you simultaneously buy one foreign currency and sell another.

This FOREX pairs trading component is another key aspect of what is forex trading all about.

Now, you’re not really taking ownership of the currency here. You’re speculating, hoping to make a profit, particularly if you can successfully get a handle on what is FOREX trading is all about.

FOREX Contract Lot Size

In FOREX, the standard contract lot size is 100,000 “units”. (As an example, 100,000 US Dollars is a standard USD contract lot size).
A “unit” is equal to (1) one single unit of currency (1 unit of USD = 1 US Dollar).

So, using the US Dollar as our example, here’s another way to look at this:

- 1 standard USD lot size = 100,000 units of the USD
- Each US Dollar unit = (1) one US Dollar

FOREX contracts can also be traded in smaller lot sizes, called a mini-contract. A a US Dollar mini lot contract = 10,000 US Dollars - - - a mini-lot contract being equal to 1/10th the size of a standard contract.

The smallest FOREX contract lot size is a micro contract. A FOREX micro contract (the USD as an example) is equal to 1/100th the size of a standard contract, or 1,000 US Dollars.

What Does FOREX Trade Mean – When It Comes To a Currency Pair?

It looks like this: EUR/USD 1.2526/2528 - - often shown as EUR/USD 1.2526/28

Using this example, when trading this FOREX pair, you’re buying the EUR (Euro), and simultaneously selling the USD (US Dollar).

For another part of the answer to the question what does FOREX trade mean or what is forex trade about, let's look a little deeper at a FOREX currency pair.

Base FOREX Currency & Quoted Currency

The first currency in any FOREX pair (EUR/USD), is called the ‘base’ currency, the Euro in this case. The second currency is called the ‘quote' or 'quoted’ currency (EUR/USD), and here that is the US Dollar.

The base currency in a FOREX quote always has a value of (1) one.

So, we're selling the base currency...which always has a value of 1. So in selling this EUR/USD pair, we're selling 1 EUR and simultaneously recieving 1.2528 USD.

This tells you how many USD (US Dollars) you will get by selling 1 EUR (Eurodollar).

As you can see, answering the question what does FOREX trade mean or understanding what is forex trading all about, isn’t a simple answer!

*(NOTE: the base currency value of (1) currency unit is not the same as the quoted base currency price . One unit of currency still has a distinct price or quote. And that price or quote will vary throughout the trading day, based on the ebb and flow of the FOREX currency market.

The FOREX Bid Ask

(In our example, the base currency (EUR)
- - - - - - 1.2526 is the ‘bid’ price,
and the second currency (the USD)
- - - - - - 1.2528 is the 'ask' price).

In our example (EUR/USD 1.2526/2528) - if we sell this currency pair...we would sell (1) unit of EUR base currency, and this would equal to simultaneously buying or receiving 1.2526 US Dollars.

The 'ask' price (1.2528)tells us how much of the second or quoted (USD) currency we'll recieve for selling 1 unit of the base (EUR) currency.

Conversely, if we were to buy the (EUR/USD 1.2526/2528) forex pair, you buy the (EUR) base currency and sell the USD(quote) currency.

And the bid price (1.2526) tells you how much of the quote currency (USD) is needed to to get or buy that 1 unit of the EUR.

FOREX PIPS

Like the men's clothing company advertisement that says "an educated consumer is our best customer", follow the below link to learn more about how to lose money in FOREX

The PIP, or Price interest Point, is universally referred to by its’ abbreviation, "PIP"...and like we said above, is a very key part in answering what does FOREX trade mean.

In the forex market, prices are quoted to the fourth decimal point. In this example (EUR/USD = 1.2526/1.2528), that last digit or decimal point – shown here bolded - (.000x) - is the PIP.

An important point to be aware of when it comes to fully understanding the answer to the question what does FOREX trade mean, is that different foreign exchange currency prices or quotes don’t all extend out to 4 digits.

The Japanese Yen for example only goes out to 2 decimal points like this - 123.17 – the “7” being the PIP.

And the PIP value of currencies can be slightly different. With the Yen here, it is .01. In our example with the USD, it is .0001.

(* Remember – PIP size [the number of decimal points it goes out to] and PIP value differ depending on the specific foreign currency you are trading.

So in our example above, there is a 2 PIP difference (EUR/USD = 1.2526/1.2528), or 2 PIP (= 0.0002) “spread”.

This spread is how FOREX brokerage firm handling your trade makes money. They buy slightly lower than the ask or selling price and profit off the difference.

Depending on your trade position, the number of PIP's a trade moves is also how you figure how much you make or lose on a FOREX trade. But that's a discussion for another day!

So, are you totally confused when it comes to what does FOREX trade mean? That’s totally understandable.

There a lot of “parts” to keep track of and understand how they all fit and work together.

This can be confusing at first. But the more you learn about FOREX trading, the clearer this will become. Hopefully this discussion has helped to answer the questions, what is forex trade, what is forex trading all about and what does FOREX trade mean.

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