At FXTM, we are committed to ensuring our clients are kept up-to-date on the latest products, state-of-the-art trading tools, platforms and accounts.
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
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.
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