Forex trading

When trading on the foreign exchange market, you buy or sell currency pairs such as EUR/USD, GBP/USD, or USD/JPY. Let’s take a closer look at the structure of currency pairs.

The first currency in the pair is called the base currency. The second currency is known as the quote currency (or counter currency). The exchange rate at which the pair is traded shows how much of the quote currency is needed to purchase one unit of the base currency.

1. Going long in Forex
   
   

2. Short selling in Forex
   
   

3. What is a Pip?
   
   

4. Forex and leverage
   
   

5. Currency Pairs
   
   

6. What influences forex markets?
   
   

7. How to make your first forex trade

Example of a quote and base currency

Let’s imagine EUR/USD is trading at 1.3010. The base currency is the euro, and the quote currency is the US dollar. This means that to purchase one euro, you need 1.3010 dollars.

Going long on forex

Traders on the foreign exchange market aim to profit from changes in the exchange rates of currency pairs. If you expect the US dollar to gain value against the euro, you can buy EUR/USD to capitalize on this movement.

Example of a long EUR/USD position

• EUR/USD is trading at 1.3010.

• You purchase 10,000 euros, which equals 13,010 USD.

• EUR/USD rises to 1.3110.

• You sell 10,000 euros for 13,110 USD, making a profit of 100 USD.
  If EUR/USD falls to 1.2910, you would incur a loss of 100 USD.

Short selling on forex

In forex trading, you don’t only have to buy currency pairs. If you believe the base currency will lose value against the quote currency, you can sell the pair instead.

Selling a forex pair means buying the quote currency by selling the base currency.

This creates a position that generates a profit when the value of the pair decreases—this is called a short position. This trading method is popular in forex because it involves no additional costs or restrictions.

Example of a short EUR/USD Position

• EUR/USD is trading at 1.3010.

• By selling 10,000 euros, you receive 13,010 USD.

• EUR/USD falls to 1.2902.

• You sell 12,902 USD to repurchase 10,000 euros, making a profit of 108 USD.
  If EUR/USD rises instead, you would incur a loss.

What is a Pip?

A pip represents the smallest possible price movement in a forex pair. In most forex pairs, a pip is defined as a one-digit movement in the fourth decimal place. For instance, if EUR/USD rises from 1.0717 to 1.0718, it has moved up by one pip.

An exception to this rule applies to pairs where the quote currency is the Japanese yen (JPY). In these cases, a pip corresponds to a one-digit movement in the second decimal place. For example, if USD/JPY falls from 110.08 to 110.03, it has moved down by five pips. This is because the yen has a comparatively lower value than other major currencies.

Fractional Pips

In addition to standard pips, a fifth decimal place is often displayed. These are known as fractional pips or pipettes, and they are sometimes written in smaller text to distinguish them from standard pips.

How to calculate Pip Value

A pip is worth 0.0001 (or 0.01%) of one unit of the quote currency. To earn one unit of the quote currency for each pip movement, you must trade 10,000 units of the base currency. This amount is called the lot size.

Example: To earn 1 USD for every pip movement in EUR/USD, you need to trade the equivalent of 10,000 EUR.

For currency pairs with the yen, a pip is worth 0.01 of the base currency. If you trade 10,000 USD in USD/JPY, a one-pip movement equals a gain or loss of 100 JPY. If USD/JPY is trading at 110.00, the pip value is equivalent to 0.91 USD, calculated as ((1 pip / 110.00) x 10,000 USD).

Example of pip value in USD/JPY

• USD/JPY is trading at 110.00.

• You trade 10,000 USD, which equals 1,100,000 JPY.

• USD/JPY rises to 111.00.

• You sell at 1,110,000 JPY, making a profit of 10,000 JPY.

• This equals 90.01 USD (10,000 JPY / 111.00).
  If USD/JPY falls by 100 pips, you would incur a loss of 10,000 JPY.

Forex and leverage

As you may have noticed, a pip has a small value in real terms. This is why most individual traders use leverage to maximize the impact of price fluctuations in forex.

Leverage allows traders to control a much larger position by depositing only a small portion of their own capital (called margin). This enables retail investors to open short-term forex positions without tying up large amounts of money.

However, leverage increases both potential profits and potential losses, so careful risk management is essential.

Currency pairs

Currency pairs are grouped into three categories based on their popularity and trade volume: major, minor, and exotic.

Major currency pairs

Major pairs represent the most frequently traded currencies, accounting for approximately 85% of the total forex market. High liquidity makes trading these pairs cheaper compared to minor pairs.

The most frequently traded major pairs include:

• EUR/USD – euro vs US dollar

• USD/JPY – US dollar vs Japanese yen

• GBP/USD – British pound vs US dollar

• AUD/USD – Australian dollar vs US dollar

• USD/CHF – US dollar vs Swiss franc

• USD/CAD – US dollar vs Canadian dollar

EUR/USD is the most popular pair, making up approximately 28% of all forex trades. All major pairs include the US dollar.

Summary of abbreviations and nicknames:

• EUR/USD – Euro-dollar

• USD/JPY – Dollar-yen

• GBP/USD – Cable

• AUD/USD – Aussie

• USD/CHF – Swissy

• USD/CAD – Loonie

What influences forex markets?

The value of currency pairs can change throughout the day due to various factors, including:

• Economic data

• Central banks

• Politics

Economic data: Currencies often reflect the economic health of their respective countries. Key indicators like inflation, unemployment, trade balances, and wage levels can significantly impact market volatility.

Central banks: These institutions influence currencies by adjusting interest rates or monetary supply. They can also intervene by directly buying or selling their currency to stabilize its value.

Politics: Political uncertainty or events can strongly impact currency markets. For instance, the US dollar is often considered a safe-haven currency, so its value typically rises during global crises.

Even seemingly minor events, such as a finance minister’s speech, can cause significant price movements.

How to make your first forex trade

Now that you have some basic knowledge about forex, you can make your first trade. If you have a demo account on the FOREX.com platform, follow these steps to open a practice trade. If you don’t have one yet, registration is quick and free. Open a demo account.

Alternatively, if you want to trade on live markets, you can open a live account.

Choose a currency pair

Beginners often focus on major pairs like EUR/USD, USD/CAD, or GBP/USD. However, you can trade any pair available on the platform, as long as you have sufficient virtual funds in your demo account.
Search for "EUR/USD" on the demo platform.

Analyze the market

Analyze whether to take a long or short position and choose your strategy. You can review historical and current charts, monitor economic news, or use technical indicators.
Review the latest news about EUR/USD and look for signals of potential price movement.

Read the quote

Forex pairs always display two prices:

Bid price – the price at which you can sell the pair.

Ask price – the price at which you can buy the pair.

The difference between these prices is called the spread, which represents the cost of trading. Spreads may vary between brokers.

Click on the market name (e.g., EUR/USD) to view the trade ticket.

Set the trade size and choose your position

The size of your trade determines the amount of the base currency you are trading and the value of each pip movement.

• Select Buy if you expect the base currency to rise in value against the quote currency.
• Select Sell if you expect the base currency to fall in value against the quote currency.
• Choose a size of 1,000 units (a mini lot) and click Place Trade to open your position.

Monitor and close your trade

To close a forex trade, you trade in the opposite direction of how you opened it. If you opened with a buy trade, you close with a sell trade, and vice versa.
Navigate to your open positions to see your current profit or loss. When you’re ready to close the position, click Close next to EUR/USD to sell 1,000 EUR/USD.