Forex currency trading
Family X · Account mechanics
Not to be confused with clusd currency pair, currency pair, znusd currency pair.
Forex currency trading is the exchange of one national currency for another on the over-the-counter foreign exchange market. Prices are quoted as currency pairs, and a position is settled either by physical delivery or by an offsetting trade before the value date. The market is decentralised, so no single exchange sets the price.
How a trade is quoted and sized
Every quote names a base currency and a quote currency, for example EUR/USD. The number shown is how many units of the quote currency are needed for one unit of the base currency. A trade is sized in lots: a standard lot is 100,000 units of the base currency, with mini, micro and nano lots at 10,000, 1,000 and 100 units. Lot sizes and available leverage vary by broker and by the jurisdiction the account is opened in.
Profit or loss is calculated in the quote currency and then converted to the account currency. The pip is the smallest conventional price increment for most pairs, usually 0.0001, or 0.01 for pairs quoted to two decimal places such as USD/JPY.
Worked example
A trader buys one standard lot of EUR/USD at 1.0850 and closes at 1.0900. The pip value is fixed in the quote currency for a standard lot.
The result excludes spreads, commissions and swap charges, which are set by the broker and vary by account type.
Settlement and market structure
Spot forex trades conventionally settle on a T+2 basis, meaning the value date is two business days after the trade date, though some pairs settle T+1. Traders who do not intend to take delivery roll the position forward, which creates a swap charge or credit based on the interest rate differential between the two currencies.
Because the market is over-the-counter, participants deal through a network of banks, brokers and electronic venues rather than a central exchange. Trading hours run continuously from the Sydney open on Monday to the New York close on Friday, and liquidity is highest when the London and New York sessions overlap.
Often confused with
- clusd currency pair
- A clusd currency pair is a synthetic or non-standard combination that is not a conventional market quotation, whereas forex currency trading refers to the general activity of exchanging currencies; the visible sign is that a clusd pair is not listed among standard major, minor or exotic quotes.
- currency pair
- A currency pair is the two-currency quotation itself, such as EUR/USD, while forex currency trading is the act of buying and selling those quotations; the visible sign is that a pair is a price label, not a transaction.
- znusd currency pair
- A znusd currency pair is a specific quoted instrument, whereas forex currency trading is the broader market activity covering all such instruments; the visible sign is that a znusd quote appears as a ticker symbol rather than as a description of trading.