About forex
What is Forex Trading?
Forex, also known as foreign exchange, refers to buying and selling one currency in exchange for another. The forex market is the most frequently traded market worldwide because multiple people can participate including individual investors, businesses, and countries. It is a decentralised market meaning that currency exchange occurs electronically. A typical example of forex trading is when travelling and you need to convert your USD for EUR. By doing so, you participate in the global foreign exchange market.
Since demand for certain currencies is very high and numerous people trade daily, the forex market is extremely liquid, hence volatile. This means that there is a constant change in prices. Most traders benefit out of this volatility. However, there are always risks involved.
All you need to know about Currency Pairs
Symbols
There are specific symbols used for all currency pairs in the forex market. For example, the euro is symbolised by EUR while the U.S. dollar is USD. So, the euro/U.S. dollar currency pair is shown as EUR/USD. Other popular and frequently traded currency symbols include AUD (Australian dollar), GBP (British pound), CHF (Swiss franc), CAD (Canadian dollar), NZD (New Zealand dollar), and JPY (Japanese yen).
Pairs
Currencies are always traded in pairs in the forex market. In the EUR/USD exchange, there are two currencies involved, so the exchange always shows the value of one currency compared to the other. In other words, it lets you know how many U.S. dollars you need to buy one euro.
Price
Each currency pair has a designated market price associated with it. This price provides information on how much of the second currency you need to buy a portion of the first one. If the price of the EUR/USD pair is 1.4565, it means that it costs 1.4565 USD to buy 1 EUR.
What is the market pricing?
Understanding the terminology around the pricing of the currency pairs and learning how to calculate it, will take you a step closer to making your first currency trade. To start with, the majority of currency pairs will move about 50 to 100 pips daily depending on the overall market conditions. A pip (Point in Percentage) refers to the fourth decimal place in a currency pair. When JPY is in the pair, it is the second decimal place. For example, when the price of the EUR/USD moves from 1.4000 to 1.4050, it indicates a 50 pip move meaning that if you buy the pair at 1.4000 and sell it at 1.4050, you will make a 50-pip profit.
Your profit will depend on how much of the currency you actually bought. You can calculate this through lots. In the case of buying 1,000 units in USD, also known as micro lot, each pip is worth $0.10, so your profit would be calculated as 50 pips x $0.10 = $5 for a 50-pip gain. Likewise, if you bought a 10,000 unit, also known as mini lot, then each pip is worth $1, so your profit will be $50. Lastly, if you bought a 100,000 unit, also known as standard lot, each pip is worth $10, so your profit will be $500.
“Pip value” determines how much each pip is worth. The above applies for any pair where the USD is listed second. Instead, if the USD is listed first, the pip value differs. To find the pip value of the USD/CHF, for instance, divide the standard pip value, which is mentioned above, by the current USD/CHF exchange rate. A micro lot is worth $0.10/0.9435 = $0.1060, where 0.9435 is the present price of the currency pair. For JPY pairs (USD/JPY), the same process applies, but you will then need to multiply by 100.
Final thoughts on forex currency pairs
In forex trading, the first currency listed in the pair is always the one determining the direction on a forex price chart. If the price is moving upwards on the EUR/USD pair, it means that the EUR is moving higher compared to the USD. If the price on the chart is declining, then the EUR is falling in value compared to the dollar.