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Questions and Answers
01 Where is the commission in forex trading?
Investors who trade stocks, futures or options typically use a broker, who acts as an agent in the transaction. The broker takes the order to an exchange and attempts to execute it as per the customer’s instructions. For providing this service, the broker is paid a commission when the customer buys and sells the tradable instrument.
02 What is a pip?
Pip stands for “percentage in point” and is the smallest increment of trade in FX. In the FX market, prices are quoted to the fourth decimal point. For example, if a bar of soap in the drugstore was priced at $1.20, in the FX market the same bar of soap would be quoted at 1.2000. The change in that fourth decimal point is called 1 pip and is typically equal to 1/100th of 1%. Among the major currencies, the only exception to that rule is the Japanese yen. One Japanese yen is now worth approximately US$0.01; so, in the USD/JPY pair, the quotation is only taken out to two decimal points (i.e. to 1/100th of yen, as opposed to 1/1000th with other major currencies).
03 What are you really selling or buying in the currency market?
The short answer is “nothing”. The retail FX market is purely a speculative market. No physical exchange of currencies ever takes place. All trades exist simply as computer entries and are netted out depending on market price. For dollar-denominated accounts, all profits or losses are calculated in dollars and recorded as such on the trader’s account.
04 Which currencies are traded in the forex market?
Although some retail dealers trade exotic currencies such as the Thai baht or the Czech koruna, the majority trade the seven most liquid currency pairs in the world, which are the four “majors”:
USD/JPY (dollar/Japanese yen)
GBP/USD (British pound/dollar)
USD/CHF (dollar/Swiss franc)
and the three commodity pairs:
AUD/USD (Australian dollar/dollar)
USD/CAD (dollar/Canadian dollar)
NZD/USD (New Zealand dollar/dollar)
05 The Bottom Line
Every discipline has its own jargon, and the currency market is no different. Here are some terms to know that will make you sound like a seasoned currency trader:
Cable, sterling, pound – alternative names for the GBP
Greenback, buck – nicknames for the U.S. dollar
Swissie – nickname for the Swiss franc
Aussie – nickname for the Australian dollar
Kiwi – nickname for the New Zealand dollar
Loonie, the little dollar – nicknames for the Canadian dollar
Figure – FX term connoting a round number like 1.2000
Yard – a billion units, as in “I sold a couple of yards of sterling.”