Paper trading forex: pairs, lots and leverage

Forex is trading one currency for another, such as euros for US dollars. This guide shows how to trade it on Trenches with paper money, practice cash at live rates. After reading it, you can read a pair's prices, size a trade, pick leverage, see your risk and close the trade.

What is a currency pair?

A pair names two currencies. The first, the base, is the one being priced, and the second, the quote currency, is what the price is counted in. Say EUR/USD reads 1.2000: one euro costs 1.20 US dollars. Two currencies, one exchange and Read the pair from left to right teach this.

On a computer, open Trade in the sidebar, then Forex in the strip at the top, with the Pairs list on the left. On a phone, tap Trade, then FX. Majors lists the pairs with the US dollar on one side, Crosses the pairs without it, and Yours the pairs you hold.

The top of a pair's page shows Sell (bid), Buy (ask) and the Spread. On a phone, the bid and ask sit under the chart. You buy at the ask, the higher price, and sell at the bid, the lower one. The spread is the gap, counted in pips, the small steps a rate moves in.

The page also shows the mid, the rate halfway between them, for display only: no trade fills, or goes through, at the mid. Here, each pair has a fixed paper spread around the mid, such as 0.8 pips on EUR/USD. The lesson A quote names two rates teaches both sides.

When is forex open?

Forex runs around the clock from Sunday 5:00 PM to Friday 5:00 PM ET, New York time. The badge by the pair's name reads Open 24/5: 24 hours a day, 5 days a week. Over the weekend it reads Closed for the weekend, and you cannot open or close a position (a trade you hold) until Sunday 5:00 PM ET.

Sessions (Market sessions on a phone), under the Pairs list on a computer, shows the working hours of Sydney, Tokyo, London and New York on one 24-hour strip. These are the cities' hours, not Trenches' hours. The lesson One clock for three cities puts Tokyo, London and New York on one clock.

The Calendar tab (Coming up on a phone) lists scheduled releases, such as US CPI, the monthly inflation report. It also lists rate decisions, when a central bank sets interest rates. On a phone, Remind sets a reminder that arrives only while Trenches is open.

Lots and pips: how big is your trade?

The ticket is the box where you set up an order, on the right on a computer and under the chart on a phone. A lot is a set number of units of the base currency, and the ticket offers three:

• Micro 1K: 1,000 units, up to 50 lots in one order
• Mini 10K: 10,000 units, up to 50 lots
• Std 100K: 100,000 units, up to 10 lots

On EUR/USD, one micro lot is 1,000 euros, and the ticket shows it as 1,000 EUR. A computer's ticket starts on Mini 10K and a phone's on Micro 1K. Lots into units drills turning lots into units.

A pip is 0.0001 on most pairs, and 0.01 on a yen pair such as USD/JPY. The lesson The convention names the pip shows why each pair states its own.

Pip value is what one pip is worth in dollars at your size. On EUR/USD, a pip on one micro lot is 1,000 times 0.0001 dollars: 10 cents. On a mini lot it is $1, and on a standard lot $10.

Say EUR/USD rises from 1.2000 to 1.2020. That is 20 pips. If you bought, you gain $2 on one micro lot, or $20 on one mini lot. If you sold, you lose the same.

Leverage and margin: what can you lose?

Leverage lets a little cash carry a bigger position. Set it with the Paper leverage slider, from 1x to 30x. Both tickets start at 10x.

The notional is the position's full size in dollars. Margin is the paper cash set aside to hold it: the notional divided by your leverage. In paper trading, the most one trade can lose is its margin.

Liquidation is the paper safety stop. A position closes when its loss reaches 90 percent of its margin, and whatever is left comes back to your paper cash. Before you place, Liquidation for this order (on a phone, Liquidation) shows that rate and how many pips away it is.

Say EUR/USD is at 1.2000 and you buy one micro lot at 10x. The notional is $1,200, so the margin is $120. Your profit or loss moves with the full $1,200, not just your $120.

A loss of $108, 90 percent of the margin, closes the trade. At 10 cents a pip, that is a fall of 1,080 pips: 9 percent, to 1.0920. At 30x, the same lot needs $40 of margin, and a 3 percent fall, 360 pips, closes it.

Place a paper trade and close it

1. Pick Buy or Sell. Buy opens a long, which gains if the rate rises. Sell opens a short, which gains if it falls.
2. Keep the order type on Market, which fills right away at the rate shown. Limit and Stop are not in paper trading yet.
3. Pick the lot size, the number of lots and your Paper leverage.
4. On a computer, open Take profit and stop loss to set exits by rate. A take profit closes the trade at a rate in your favor, a stop loss at one against you.
5. Read Pip value, Margin, Liquidation and Swap per night, an overnight charge or credit explained below.
6. Place it. The button names your fill rate: the ask for a Buy, the bid for a Sell. If it reads Market closed, Not enough cash or Waiting for price, it cannot place yet.

On a phone, two buttons sit at the bottom. The one showing a rate, such as Buy at 1.20004, places the trade in one tap. The other just reads Sell: tap it once to switch sides, then again to place. Add exits after the trade opens.

The margin leaves your paper cash when the trade opens. Another Buy on a pair you hold long adds to it, and your entry, the rate you got in at, becomes the average of both buys.

Easy to mix up: Sell and close. A Sell on a pair you hold long does not close it. It opens a separate short beside it.

The Your positions tab (on a phone, the card under the chart) shows each trade's pips and your result, with the swap so far.

To close, a long sells at the bid and a short buys back at the ask. On a computer, click Close, then Confirm. On a phone, tap Edit TP/SL or close (TP/SL is take profit and stop loss), then Close at, which shows the rate and your result.

You get back the margin, plus or minus your result and the swap. Trenches checks exits and liquidation only while it is open. If it was closed, they run when you come back, at the rate then, which can be past your stop.

What does a forex trade cost?

On Trenches, forex has no separate fee: it "pays its spread inside the fill price," as the note under your trades on a computer's profile says. So a new position starts the spread behind. Say you buy one micro lot of EUR/USD: its 0.8-pip spread, at 10 cents a pip, puts you 8 cents down.

A swap is a small charge or credit for each night a position stays open. Each pair and side has a set rate from a table Trenches keeps, based roughly on the gap between the two currencies' interest rates. It is booked at the 5 PM ET rollover, when the forex day turns over, and weekends count too.

Swap per night shows it for your order before you place, and a minus means you pay. Say your micro lot pays 6 cents a night: Friday to Monday is three nights, so 18 cents. The Rates and swaps tab on a computer lists the rates for every pair. The swap builds up on the position and settles when you close.