A great deal of forex trade exists to accommodate speculation on the direction of currency values. Currencies being traded are listed in pairs, such as USD/CAD, EUR/USD, or USD/JPY. These represent the U.S. Traders profit from the price movement of a particular pair of currencies. There will also be a price associated with each pair, such as 1.2569. If this price was associated with the USD/CAD pair it means that it costs 1.2569 CAD to buy one USD.

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Unlike a forward, the terms of a futures contract are non-negotiable. A profit is made on the difference between the prices the contract was bought and sold at. Instead, speculators buy and sell the contracts prior to expiration, realizing their profits or losses on their transactions. Most speculators don’t hold futures contracts until expiration, as that would require they deliver/settle the currency the contract represents. This means investors aren’t held to as strict standards or regulations as those in the stock, futures, or options markets. There are some major differences between the way the forex operates and other markets such as the U.S.

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Assume a trader believes that the EUR will appreciate against the USD. Another way of thinking of it is that the USD will fall relative to the EUR. The trader buys the EUR/USD at 1.2500 and purchases $5,000 worth of currency. The broker will roll over the position, resulting in a credit or debit based on the interest rate differential between the Eurozone and the U.S. Currency prices move constantly, so the trader may decide to hold the position overnight. If the Eurozone has an interest rate of 4% and the U.S.

If the price increases to 1.3336, it now costs 1.3336 CAD to buy one USD. This is obviously exchanging money on a larger scale than going to a bank to exchange $500 to take on a trip. The USD has increased in value (the CAD has decreased) as it now costs more CAD to buy one USD. In the forex market, currencies trade in lots called micro, mini, and standard lots.

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