In this market, you may buy or sell currencies. The objective is to earn a profit from your position. Placing a trade in the foreign exchange market is simple: The mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless.

Let's walk through a sample trade:

Let's suppose we believe the Euro will appreciate versus the US Dollar. We would be looking to trade the Euro and US Dollar currency pair (EUR/USD). Now let's assume the initial quote is 1.2853 (bid) by 1.2856 (ask):

Since we expect the Euro to appreciate against the US Dollar, we will purchase
100,000 Euros at a price of 1.2856 (ask price). Keep in mind, leverage capabilities are much higher in Forex, so the margin requirement for this position is only $1285.60. When you buy a currency, you are simultaneously selling the counter currency (US $$ in this example).

Now let's assume our expectation was correct and the Euro appreciates against the US Dollar.

Now the quote is:

This means we would be closing the position by selling EUR/USD at the bid price of 1.2889. This means we bought 100,000 EUR at 1.2856 and sold it at 1.2889 for a profit of 33 pips or $330. Pips typically have values of $8-$10 depending on the counter currency for the pair you are trading.

Let's take a look at the same trade in a different fashion:

So, the total profit on the trade is $330.

Just like in all markets, there are two prices for every currency pair. The difference between these two prices is the spread, or the cost of the trade. In this example, the spread is 3 pips.