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Forex Basics
Into The Market


What is Forex?
"Forex" stands for foreign exchange; it's also known as FX. In a forex trade, you buy one currency while simultaneously selling another.

Currencies trade in pairs, like the Euro-US Dollar (EUR/USD) or US Dollar / Japanese Yen (USD/JPY).

Forex trading is used to speculate on the relative strength of one currency against another. The foreign exchange market is an over-the-counter market, which means that it is a decentralised market with no central exchange.

Who trades currencies, and why?

Daily turnover in the world's currencies comes from two sources:
Foreign trade (5%).
Companies buy and sell products in foreign countries, plus convert profits from foreign sales into domestic currency.

Speculation for profit (95%).
Most traders focus on the biggest, most liquid currency pairs, known as "The Majors". These include US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. In fact, more than 85% of daily forex trading happens in the major currency pairs.

The world's most traded market, open 24 hours a day

With average daily turnover of US$3.2 trillion, forex is the most traded market in the world.
A true 24-hour market from Sunday 5 PM ET to Friday 5 PM ET, forex trading begins in Sydney, and moves around the globe as the business day begins, first to Tokyo, London, and New York.

Unlike other financial markets, investors can respond immediately to currency fluctuations, whenever they occur - day or night.

Forex Quotes

Understanding Forex Quotes

Reading a foreign exchange quote is simple if you remember two things:
The first currency listed is the base currency
The value of the base currency is always 1.
The US dollar is usually considered the base currency for quotes. When the base currency is USD, think of the quote as telling you what a US dollar is worth in that other currency.

When USD is the base currency and the quote goes up, that means USD has strengthened in value and the other currency has weakened. In other words, a rising quote means that the US dollar can buy more of the other currency than before.

Majors not based on the US dollar

There are three exceptions when the US Dollar is not the base currency of a pair - these exceptions are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR).

For these pairs, the quote is based on the other currency, and a rising quote means that the other currency is strengthening, and the US dollar is weakening.

Cross currencies

Currency pairs that don't involve USD at all are called cross currencies.

BID, ASK and the Spread

Just like other markets, forex quotes consist of two sides, the BID and the ASK:

The BID is the price at which you can SELL base currency.
The ASK is the price at which you can BUY base currency.

The spread is the difference between the BID and the ASK, and represents the cost of trading. In forex, spreads are tighter than many other markets, making it cost effective to trade on relatively small price movements.

What's a pip?

Forex prices are generally very liquid, and are usually quoted in very small increments called pips, or "percentage in point". A pip refers to the fourth decimal point out, or 1/100th of 1%.


Calculating Profit & Loss
online trading platform will automatically calculate the P&L of your open positions, but it is useful to understand how this calculation is made to understand your profit and loss potential on each trade.

Example
Let's say that the current bid/ask for EUR/USD is 1.46160/190, meaning you can buy 1 euro for 1.46190 or sell 1 euro for 1.46160.

Suppose you decide that the Euro is undervalued against the US dollar, and you expect it to strengthen, you would buy Euros (simultaneously selling dollars), and then wait for the exchange rate to rise.

To make the trade you buy 100,000 Euros, paying 146,190 dollars (100,000 x 1.46190). At 1% margin, your initial margin deposit would be approximately $1,461 for this trade.

If as you expected, the Euro strengthens you can realise a profit by selling EUR/USD to close your trade. If the Euro had strengthened to 1.462300/260, you would sell 100,000 Euros at the current rate of 1.46230, and receive $146,230

To calculate your profit:

You bought 100,000 Euros at 1.46190, paying $146,190.

You sold 100,000 Euros at 1.46230, receiving $146,230.

That's a difference of 4 pips, or in dollar terms ($146,190 - 146,230 = $40).

Total profit = US $40.


Let's say that we once again buy EUR/USD when trading at 1.46160/190.

You buy 100,000 Euros paying 146,190 dollars (100,000 x 1.46190) - as in example 1.

However, in this example the Euro weakens to 1.46110/140. To minimise your loss you sell 100,000 Euros at 1.46110 and receive $146,110.

To calculate your loss:

You bought 100k Euros at 1.46190, paying $146,190.

You sold 100k Euros at 1.46110, receiving $146,110.

That's a difference of 8 pips, or in dollar terms ($146,190 - $146,110 = $80).

Total loss = US $80



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