Just as the name implies, a Forex trade involves an exchange of foreign currencies. More specifically, when a trade is executed, a simultaneous purchase and sale are made. For example, if you wanted to exchange US Dollars for British Pounds, you would be buying British Pounds by selling US Dollars. Thus, every Forex transaction involves a pair of currencies, so when deciding which pair to trade, you must think not only about which currency to buy or sell, but what currency to do so against. For every currency that goes up in value, there is another currency that is going down.
With FOREX.com, traders can trade 37 currency pairs, gold, silver and oil.
Most Forex traders—especially new ones—typically narrow their scope and trade one or more of what are considered to be the “Major Currency Pairs”, which are shown on the following table.
|EUR / USD||Euro-Dollar||Euro|
|USD / JPY||Dollar-Yen||Yen|
|GBP / USD||Sterling-Dollar||Sterling or Cable|
|USD / CHF||Dollar-Swiss||Swissy|
|AUD / USD||Australian-Dollar||Aussie|
|USD / CAD||Dollar-Canada||Loonie|
|NZD / USD||New Zealand-Dollar||Kiwi|
The first thing you might notice is that the US Dollar appears in each pair. While no longer the most valuable currency in the world, the US Dollar still occupies a powerful place in the global economy. Therefore, a simple rule is this: If a currency pair contains the US Dollar, then it can be considered a major pair. Trading in the major currency pairs accounts for nearly 75% of all Forex transactions.
Pairs that do not contain the US Dollar are referred to as “Cross Currency Pairs”, or crosses. The most actively traded crosses are listed below.
Currency pairs are written using the ISO abbreviations of the world currencies. For example, the Euro/US Dollar pair is written EUR/USD. The order in which the currencies appear in the pair is fixed and cannot be changed. When the pairs were formalised, the historically stronger currency would always be displayed first. It is this first currency in the pair that is referred to as the base currency. The second currency is known as the counter currency.
EUR / USD
The base currency is important to traders. It is the actionable currency in the pair; the currency that is actually being bought or sold. It is also the currency displayed on price charts for specific currency pairs. So when looking at a chart of the USD/JPY, for example, each rise and fall represents the strengthening and weakening of the Dollar (relative to the Yen).
Buying and selling are the core actions for all trading. Traders also refer to these actions by the terms “Long” and “Short”. When a new position is established through buying, a trader is said to have an open long position, or the trader had gone long. Conversely, when a trader establishes a new position through a sale, the trader has opened a short position, or has gone short.
The concept of going short can be confusing to many new traders. How do you sell something that you don’t own? In Forex trading, it is important to remember that in every trade there are two transactions taking place. In instances where a trader goes long EUR/USD, the trader is actually buying EUR and selling USD. When a trader goes short EUR/USD, they are actually doing the opposite—selling EUR and buying USD.
Why would a trader want to go short? A trader goes short a currency when he believes it will fall in value. The trader’s goal is to sell at a high price and close the position by buying the currency back at a lower rate (the difference in the prices would be the profit). The ease in which Forex traders can go long or short allows the potential to benefit from any market condition, whether bullish or bearish.
A currency quote is the most fundamental piece of information that a Forex trader has. Always changing, a currency quote represents the exchange rate of two currencies at a given point in time. It is based on this information that all trading decisions are ultimately derived, and it is through the quotes’ constant flux that the Forex market exists.
A currency quote defines the value of a currency. It shows how much of the counter currency is equal to one of the base currency. Like quotes for other financial instruments, a currency quote is comprised of two prices. The first price, called the bid, is the price at which the currency can be sold. The second price, called the ask or offer, is the price at which the currency can be bought.
1.2838 / 1.2843
The difference between the bid and the ask price is referred to as the spread. Depending on the account type, the spread may be static or floating. Regardless of whether it’s static or floating, the spread will vary depending on the currency pair being traded.
The FOREX.com Advantage
FOREX.com provides traders with precision pricing through fractional quotes. With fractional pricing, FOREX.com’s real-time executable prices are in more precise 0.1 pip increments. This extra digit of precision allows traders to take advantage of smaller price movements.
Similar to the stocks that move up and down cent by cent, currencies move by fractions of a cent called pips. A pip, or percentage in point, represents the smallest price change that a given exchange rate can make. Since most currencies are priced to the fourth decimal, a pip is usually the equivalent of 1/100th of one percent. The exception is for the Yen, which is priced to the second decimal. The following example will help illustrate currency price movements in pips.
The FOREX.com Advantage
Traders can trade on spreads as low as 1 to 2 pips on the most widely traded currency pairs at FOREX.com.
Let’s say that the EUR/USD is trading at 1.3946. If the rate moves to 1.3947, it has gone up by 1 pip. Now let’s say that from 1.3947, the EUR/USD goes to 1.3900. In this case, the EUR/USD has gone down 47 pips. If the USD/JPY goes from 96.10 to 96.25, it has gone up 15 pips. If it goes from 96.10 to 95.10, the USD/JPY has gone down 100 pips.
In addition to being used to track price movement, pips can also be used to track performance—specifically, profit and loss. Forex traders will usually tabulate winners and losers based on the number of pips gained or lost (i.e. a 100 pip gain or a 25 pip loss). Using the previous example, if a trader had gone long, or bought, at 1.3150 and the rate went up to 1.3155, the trader would have been up 5 pips on the trade. Alternatively, if the trader had gone long at 1.3150 and the currency moved to 1.3100, the trader would have been down 50 pips.
At some point, a trader will want to know what the profit or loss equates to in an actual monetary amount. To do so, the trader will have to determine the value of a pip, which is dependent on a few factors: namely, the currency pair being traded and the amount being traded.
The calculation for determining pip value is pretty straightforward. Below are the steps in this process, using the EUR/USD as an example.
The FOREX.com Advantage
With its Pip & Margin Calculator, FOREX.com has made the process of manually determining pip value a thing of the past. An online tool accessible directly from the FOREXTrader trading platform, the Pip & Margin Calculator quickly computes the pip value for all currency pairs instantly with the click of a button.
Margin refers to the amount of a trader’s capital that is necessary to open and hold a trading position. The necessary amount of margin—or the margin requirement—depends on the currency pair being traded, the amount being traded, and the leverage being used.
The FOREX.com Advantage
At FOREX.com available margin is automatically calculated for you in real time and displayed in an easy to read Margin Monitor.
Using leverage allows a trader to magnify their trading capital, which in turn allows the trader to open and hold larger positions with the hopes of increasing potential profits. It is important to note, however, that as much as leverage can aid in magnifying profits, it can just as easily magnify potential losses. Thus, it is crucial that a trader understands the concept of leverage and implements some form of risk management into their trading strategies.
It is very important for a trader to know exactly what the margin requirement is for any and all positions being considered. Use the Pip and Margin Calculator on the trading platform to work this out.
Similar to pip values, margin requirements will vary depending on the currency pair being traded and the leverage being employed.
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Thu, 1st Jan - * Next week will get off to a slow start, due to the Spring Bank holiday in the UK and the Memorial Day holiday Stateside, although the macroeconomic data flow will accelerate towards the end of the same, particularly in the US. Nevertheless, local elections in Italy this next Sunday - May 27th - may bear watching.