An exchange rate is simply the ratio of one currency valued against another currency. The reason they are quoted in pairs is because in every foreign exchange transaction you are simultaneously buying one currency and selling another. Here is an example of a foreign exchange rate for the British pound versus the U. When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency.

In the example above, you have to pay 1.

USDCHF UPDATED

When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example above, you will receive 1. You would buy the pair if you believe the base currency will appreciate go up relative to the quote currency. You would sell the pair if you think the base currency will depreciate go down relative to the quote currency. If you want to buy which actually means buy the base currency and sell the quote currency , you want the base currency to rise in value and then you would sell it back at a higher price. In trader's talk, this is called "going long" or taking a "long position".

If you want to sell which actually means sell the base currency and buy the quote currency , you want the base currency to fall in value and then you would buy it back at a lower price. This is called "going short" or taking a "short position". The bid is always lower than the ask price. The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency.

This means the bid is the price at which you as the trader will sell. The ask is the price at which the dealer will sell the base currency in exchange for the quote currency. This means the ask is the price at which you will buy. Look at how this broker makes it so easy for you to trade away your money. If you want to sell GBP, you click "Sell" and you will sell pounds at 1. If you want to buy GBP, you click "Buy" and you will buy pounds at 1. In the following examples, we're going to use fundamental analysis to help us decide whether to buy or sell a specific currency pair.

We will cover fundamental analysis in a later lesson.

By doing so you have bought euros in the expectation that they will rise versus the US dollar. By doing so you have sold Euros in the expectation that they will fall versus the US dollar. By doing so you have bought U. S dollars in the expectation that they will rise versus the Japanese yen. If you believe that Japanese investors are pulling money out of U. By doing so you have sold U. S dollars in the expectation that they will depreciate against the Japanese yen. By doing so you have bought pounds in the expectation that they will rise versus the US dollar. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.

By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc. Can I still trade?

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You can with margin trading! Margin trading is simply the term used for trading with borrowed capital. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital. We will be discussing these in depth in our next lesson. For now, just think of the term "lot" as the minimum amount of currency you have to buy.

When you go to the grocery store and want to buy an egg, you can't just buy a single egg; they come in dozens or "lots" of Your predictions come true and you decide to sell. A pip is the smallest price movement available in a currency. When you decide to close a position, the deposit that you originally made is returned to you and a calculation of your profits or losses is done.

This profit or loss is then credited to your account. Rollover No, this is not the same as rollover minutes from your cell phone carrier! If you do not want to earn or pay interest on your positions, simply make sure they are all closed before 5pm EST, the established end of the market day. Since every currency trade involves borrowing one currency to buy another, interest rollover charges are part of Forex trading. Interest is paid on the currency that is borrowed, and earned on the one that is bought. Ask your broker or dealer about specific details regarding rollover.

Also note that many retail brokers do adjust their rollover rates based on different factors e. Don't know what the interest rates are for each currency? Here is a chart to help you out. Demo Trading You can open a demo account for free with most Forex brokers. This account has the full capabilities of a "real" account.

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Why is it free? It's because the broker wants you to learn the ins and outs of their trading platform, and have a good time trading without risk, so you'll fall in love with them and deposit real money. The demo account allows you to learn about the Forex markets and test your trading skills with ZERO risk. You've probably heard of the terms "pips" and "lots" thrown around, and here we're going to explain what they are and show you how they are calculated. Take your time with this information, as it is required knowledge for all Forex traders. The most common increment of currencies is the Pip.

A pip is the last decimal place of a quotation. The Pip is how you measure your profit or loss. As each currency has its own value, it is necessary to calculate the value of a pip for that particular currency.

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In currencies where the US Dollar is quoted first, the calculation would be as follows. Nearly all Forex brokers will work all this out for you automatically. Spot Forex is traded in lots.

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As you already know, currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments, you need to trade large amounts of a particular currency in order to see any significant profit or loss. We will now recalculate some examples to see how it affects the pip value.

Your broker may have a different convention for calculating pip value relative to lot size but whichever way they do it, they'll be able to tell you what the pip value is for the currency you are trading is at the particular time.

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As the market moves, so will the pip value depending on what currency you are currently trading. The rate you are quoted is 1. Because you are buying US you will be working on the 1.

Since you're closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the 1. The price traders are prepared to buy at. The difference between 1.