For those just getting started, we have created a comprehensive Beginner’s Guide to introduce you to forex terminology, answer common FAQs and, most importantly, we have kept things simple.
Looking for more in-depth information on forex terminology? Head over to our glossary page.
What is the forex market?
What is forex trading?
What is a forex broker?
Foreign exchange (also known as forex or FX) refers to the global, over-the-counter market (OTC) where traders, investors, institutions and banks, exchange speculate on, buy and sell world currencies.
Trading is conducted over the ‘interbank market’, an online channel through which currencies are traded 24 hours a day, five days a week. Forex is one of the largest trading markets, with a global daily turnover estimated to exceed US$5 trillion.
Forex trading is the act of buying or selling currencies. Banks, central banks, corporations, institutional investors and individual traders exchange foreign currency for a variety of reasons, including balancing the markets, facilitating international trade and tourism, or making a profit.
Currency is traded in pairs, in both spot and futures markets. The value of a currency pair is driven by economic, political and environmental factors, such as wars, natural disasters, or national elections.
Brokers act as intermediaries, facilitating trades by providing clients access to the 24-hour interbank
in order to conduct trades.
FXTM offers a number of different accounts, each providing services and features tailored to our clients’ individual trading objectives. Discover the account that’s right for you on our account page. New to forex trading? Learn about the markets by opening a demo account page.
All transactions made on the forex market involve the simultaneous purchasing and selling of two currencies.
These are called ‘currency pairs’, and include a base currency and a quote currency. The display below shows the forex pair EUR/USD (Euro/US Dollar), one of the most common currency pairs used on the forex market.
Sell 1 Euro for 1.0916 US Dollars
Buy 1 Euro for 1.0918 US Dollars
Ask Price - Bid Price
1.0918 - 1.0916 = 0.0002 (2 pips)
Ask Price - Bid Price
1.0918 - 1.0916 = 0.0002 (2 pips)
The base currency is the first currency that appears in a forex pair. This currency is bought or sold in exchange for the quote currency.
So, based on the example above, it will cost a trader 1.0916 USD to buy 1 EUR.
Alternatively, a trader could sell 1 EUR for 1.0916 USD.
The quote currency – also referred to as the ‘counter’ currency – is the second currency that appears in a forex pair.
The Ask Price is the price a trader will sell a currency for.
It is given in real-time and will change constantly, driven by market demand, as well as the political and economic factors
that influence the value of individual currencies.
The Bid Price is the price a trader is willing to buy a currency pair at. It is given in real-time and is constantly updated.
A spread is the difference between the ask price and the bid price. In other words, it is the cost of trading.
For example, if the Euro to US dollar is trading with an ask price of 1.0918 and a bid price of 1.0916, then the spread will be the ask price minus the bid price. In this case, 0.0002.
A point in price – or pip for short – is a measure of the change in a currency pair in the forex market.
The acronym can also stand for ‘percentage in point’ and ‘price interest point’. A pip is used to measure price movements, and it represents a change in a currency pair. Most currency pairs are quoted to five decimal places.
Note: Forex prices are often quoted to four decimal places because their spread differences are typically very small. However, there is no definitive rule when it comes to the number of decimal places used for forex quotes.
On the forex market, trades in currencies are often worth millions, so small bid-ask price differences (i.e. several pips) can soon add up to a significant profit. Of course, such large trading volumes mean a small spread can also equate to significant losses.
Always trade carefully and consider the risks involved.
A ‘position’ is the term used to describe a trade in progress. A long position means a trader has bought currency expecting the value to increase. Once the trader sells that currency back to the market (ideally for a higher price than he paid), his long position is said to be ‘closed’ and the trade is complete.
A short position refers to a trader who sells a currency expecting it to decrease, and plans to buy it back at a lower value. A short position is ‘closed’ once the trader buys back the asset (ideally for less than he sold it for).
For example, if the currency pair EUR/USD was trading at 1.0916/1.0918, then an investor looking to open a long position on the euro would purchase 1 EUR for 1.0918 USD. The trader will then hold the euro in the hopes that it will appreciate, selling it back to the market at a profit once the price has increased.
An investor going short on EUR would sell 1 EUR for 1.0916 USD. This trader expects the euro to depreciate, and plans to buy it back at a lower rate if it does.
There are seven Major currency pairs on the forex market. Other brackets include Crosses and Exotic currency pairs, which are less commonly traded and all relatively illiquid (i.e., not easily exchanged for cash).
Major pairs are the most commonly traded, and account for nearly 80% of trade volume on the forex market.
These currency pairs could typically have low volatility and high liquidity.
They are associated with stable, well managed economies, are less susceptible to manipulation and have smaller spreads than other pairs.
Cross currency pairs – Crosses – are pairs that do not include the USD.
Historically, Crosses were converted first into USD and then into the desired currency, but are now offered for direct exchange.
The most commonly traded are derived from Minor currency pairs (eg. EUR/GBP, EUR/JPY, GBP/JPY); they are typically less liquid and more volatile than Major currency pairs.
Exotics are currencies from emerging or smaller economies, paired with a Major.
Compared to Crosses and Majors, Exotics are much riskier to trade because they are less liquid, more volatile, and more susceptible to manipulation.
They also contain wider spreads, and are more sensitive to sudden shifts in political and financial developments.
Below, we’ve created a table which showcases several different currency pairs from each bracket, as well as some nicknames which were coined by traders themselves.
N. Zealand Dollar
A candlestick is a chart, also known as a Japanese Candlestick Chart, and is favoured by traders due to the wide range of information they portray. The chart displays the high, low, opening and closing prices.
A candlestick has three points; open close and the wicks.
The wicks show the high to low range and the 'real body' (wide section) shows investors if the closing price was higher or lower than the opening price.
If the candlestick is filled then the currency pair closed lower than it opened. If the candlestick is hollow, then the closing price is higher than the opening price.
A bar chart shows the opening, close, high and low of the currency prices.
The top of the bar represents the highest paid price and the bottom indicates the lowest traded price for that specific time period.
The actual bar represents the currency pair's overall trading range and the horizontal lines on the sides represent the opening (left) and the closing prices (right).
A bar chart is most commonly used to identify the contraction and expansion of price ranges.
A line chart is easy to understand for forex trading beginners. In a line chart, a line is drawn from one closing price to the next.
When connected, it is easy to identify a general price movement of a currency pair throughout a time period and determine currency patterns.
In this guide, we’ve briefly covered some of the most important aspects of forex trading, including key terminology, what currency pairs are, how currency pair transactions work, and how investors can profit from positions taken on the forex market.
Take your trading to the next level with our instructional videos, articles, webinars and glossary, all available free on the education section of our website.
FXTM’s industry-leading educational resources are available in 22 languages, and are tailored to the needs of both experienced and novice traders.
How forex trading works?
It is essentially the process of buying and selling currencies in order to make a profit. The price of one currency is linked to the price of another currency in a trade, so you will always work with two currencies at a time.
The base currency is the first currency appearing in a currency pair quotation, followed the quote currency.
The difference in price between the currencies is where your profit, or loss sits.
How to start Forex trading
Look for a regulated broker that has at least a 5 year track record. If your broker abides by regulatory rules, then you can be sure that they are legitimate. Once you have an active account you can trade but you will be required to make a deposit to cover the costs of your trades. This is called a margin account.
Fortunately there is an enormous amount of training material available to both new and established traders. The training comes in many formats designed to suit your style of learning. You can attend workshops and seminars, do online tutorials and webinars, or read Ebooks and articles. They will all assist you to become a better trader.
Learn forex trading
Learning about forex trading is the first step any successful trader takes. There are many different types of learning materials available to traders-from beginners to advanced.
There are many forex tools available to traders such as margin calculators, pip calculators, profit calculators, economic trading calendars, trading signals and foreign exchange currency converters.
Forex widgets can help you to enhance your trading experience. Some of the more popular widgets include, Live rates feed, Live Commodities Quotes, Live Indices Quotes, and market update widgets.
We are a leading global broker, committed to providing services tailored to the needs of our clients. As such, FXTM is proud to offer its traders the choice of two of the industry’s leading forex trading platforms; MetaTrader 4 (MT4) and MetaTrader 5 (MT5).
These platforms, combined with innovative services such as FXTM’s Pivot Point tool and FXTM Invest, as well an award-winning customer support team, ensures FXTM traders have the resources they need to trade with confidence.
You can find out more about our trading platforms, or download MT4 and MT5 from our trading platforms page.
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