FX Trading and Base Pair Spreads

Looking at a Forex, or FX trading quote might seem confusing at first, but it's actually quite simple. Remember that foreign exchange trades in pairs. The first currency is the base currency, and it's "base value" is always 1.

The basis of Fundamental Analysis are, as the name implies, the "fundamentals". This includes world and news events, economic forecasting, and any of the "real-world" factors that influence a nation's currency.

The Forex market revolves around US currency, and it is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For this and most other currencies, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.

In EUR/USD, a 3 pip spread is quoted as 1.250.00/1.250.03. In USD/JPY, a 3 pip spread is quoted as 114.05/114.08 In the Forex market, prices are quoted "pips". Pip stands for "percentage in point" and is the fourth decimal point, which is 1/100th of 1%.

Among the major currencies, the only exception to that rule is the Japanese yen. In USD/JPY, the quotation is only taken out to two decimal points (i.e. to 1/100 th of yen, as opposed to 1/1000th with other major currencies).

Forex Trading usually occurs on margin. Most commonly, it is a 1% margin, meaning that there is 100 to one leverage.

This 1% margin means that a Forex Trading in faster can take advantage of very small currency exchange rate fluctuations.

With 100 to one to leverage, a $1000 accounts can trade $100,000 worth of currency. While that enables you to make large profits very quickly, which is one of the strong attractions of FX Trading, there is also a greater risk of incurring large losses and even being completely wiped out.