When you stepped off the airplane, one of your first stops probably was to exchange your money for the local currency. Forex trading turns that little airport or ATM currency exchange into a sport. A little healthy trepidation serves investors well.

We strongly recommend low-cost index funds for long-term goals like saving for retirement. And hey, this seems like a good place to note that reputable forex brokers almost always give investors access to a demo trading account. Being able to read and really understand a forex quote is, unsurprisingly, key to trading forex. Within a pair, one currency will always be the base and one will always be the counter — so, when traded with the USD, the EUR is always the base currency.

As with stock trading, the bid and ask prices are key to a currency quote. The bid price is always lower than the ask price, and the tighter the spread, the better for the investor. Many brokers mark up, or widen, the spread by raising the ask price. They then pocket the extra rather than charging a set trade commission.

Remember when we said forex trading was complex? A pip is the forex version of a point: To figure out how many pips are in the spread, subtract the bid price from the ask price: That gives you 0. For most pairs, the smallest price movement happens in the fourth digit after the decimal, so the spread here is 1.

As noted at the start of this post, forex trading is risky.

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Where things get hairy is that leverage mentioned earlier. Leverage allows you to borrow money from the broker to trade more than your account value.

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Many brokers offer leverage of up to NerdWallet strives to keep its information accurate and up to date. All financial products, shopping products and services are presented without warranty. Pre-qualified offers are not binding. So how do we make money? We receive compensation from our partners when someone applies or gets approved for a financial product through our site.

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The Basics Of Currency Trading

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