Forex Basics
What is Forex Market
Simply said Forex is a financial market that allows currency trading. It is a global marketplace where financial assets are bought and sold. The financial market consists of different categories: stocks, metals, futures, bonds etc. However, the biggest and most popular is the currencies market – the foreign exchange market, also referred to as Forex. It is the largest and most liquid market in the world. Forex daily volumes exceed $6 trillion.
How to trade on the Forex Market
In order to be able to trade forex on a retail forex market, you will need to sign up with a reliable forex broker. Your broker will give you access to the trading platform where you will be able to access forex pair pricing and execute live trades. If you open a BUY order via your online platform and wait for the price to increase, you can then close your position and make profit. Profit is added to your trading account once the position is closed. In case your trade price decreases – your position will be closed in loss and your trading account balance will decrease.
Forex pairs - major, minor and exotic pairs
Forex is always traded in currency pairs. When someone trades forex they simultaneously buy one currency and sell another. Currencies are quoted in relation to another currency and displayed as follows:
EUR/USD
GBP/EUR
USD/JPY
Majors. There are 7 major currency pairs and all 7 of them include US dollar. Those are the pairs with highest liquidity in the market:
EUR/USD
USD/JPY
GBP/USD
USD/CHF
USD/CAD
AUD/USD
NZD/USD
Minors. All the other currency pairs that include any two of the major currencies with the exception of US Dollar are called minor currency pairs. Some examples of minor currency pairs:
EUR/AUD
EUR/CAD
CAD/JPY
NZD/CHF
GBP/CAD
EUR/JPY
Exotics. Exotic currency pairs contain one major currency paired with the currency of some emerging economy, such as Turkey, Brazil, Russia or Mexico. Some examples of the exotics below:
USD/BRL
USD/MXN
USD/RUB
USD/THB
USD/SGD
USD/ZAR
What is Bid and Ask price
The Ask price is the price at which broker is going to sell, meaning the price at which trader can Buy the pair.
The Bid price is the price at which brokers is going to buy, meaning the price at which trader can Sell the pair.
When a trader opens a BUY position, it will be opened at the Ask Price and closed at the Bid price.
When a trader opens a SELL position, it will be opened at the Bid price and closed at the Ask price.
What is a Spread
The difference between Bid and Ask price is called the Spread. This is what the trader pays to the broker to open a trade. Spread in Forex trading is quoted in pips. The tighter the spread – the more beneficial it is for the trader.
What is a Pip
A pip is the smallest standard increment in which a currency pair can move. Usually, it is the fourth digit after the decimal point. Some currencies may be different though. For example, when trading Japanese yen, a pip is a change in the second digit after the decimal point. Below you can see some examples how pair quotes are displayed and pip for each pair is highlighted:
EUR/USD – 1.16412
GBP/CAD – 1.81672
USD/JPY – 111.781
What is a Lot
Lot represents the trade volume in units. One standard forex lot represents 100,000 units of the base currency of the pair.
Mini and Micro lots are also available for trading:
Standard lot (1.0) = 100,000 of base currency
Mini Lot (0.1) = 10,000 of base currency
Micro Lot (0.01) = 1,000 of base currency.
What is Leverage
Leverage is the increased trading power. It allows traders to trade positions that are larger than the amount of money the trading account. Leverage is always expressed in ratio. It shows the ratio of the amount of money you have versus the amount of money you can trade. For example: 1:2000 1:30 1:500. Leverage is directly related to Margin.
What is Margin
Margin is a capital required to open and maintain a trading position. This is a portion of the funds that forex broker sets aside from the account balance in order to keep the trade open and ensure that trader can cover the potential loss of the trade.
What is Equity
Equity represents the value of the trading account. If there are open positions on the account, its equity will be moving – meaning it fluctuates with every tick as the open trades move into profit or loss. As the trades rise or fall in value, so does the Equity of the trading account. When there are no open positions on the trading account, its Equity is equal to its Balance.
Trade Order Types
Market order
Market order is an order that is instantly executed against a price provided by the broker. Market orders can be two types: Sell and Buy.
Pending Order
Pending order is an order that will be executed at a later time. It will be triggered open when the price reaches the price point that trader pre-specified when creating the order. Pending orders can be 4 different types: Buy Limit, Sell Limit, Buy Stop, Sell Stop.
Forex terminology
Short and Long positions
When trader sells he enters a short position. When trader buys he enters a long position.
Bearish and Bullish market
It refers to whether market trend is going up or down. When prices are falling the market is referred to as bearish, or bear. When prices are rising the market is referred to as bullish, or bull.
CFD
Contract for Difference.
Swap
The interest rate which is either added to or deducted from the trading account for keeping the position open overnight.
Floating P/L (Unrealized P/L)
Refers to the profit and loss held in currently open positions.