Forex Trading Basics

Currency Pair #

  • Currencies are traded in pairs. Each currency pair constitutes an individual trading product.

  • Every currency trade involves at least two different currencies. If someone is short USD, then that person must be long some other currencies at the same time. He/she can’t trade only one currency because one currency alone does not fluctuate.

  • The value of a currency fluctuates constantly when measured against other currencies. The exchange rate of a currency pair is what forex traders trade with.

  • The first currency of any currency pair is called the base currency. The second member of any currency pair is called the counter currency or quote currency.

  • In the spot currency market, the order of the currencies in a currency pair is fixed. The ISO (International Organization for Standardization) determines the symbol for a currency and the order of currencies in each pair. For example, EUR/USD is the official order determined by the ISO.

    • Usually, USD is the base currency (e.g. USDJPY, USDCAD, USDCHF).
    • The exceptions are GBP, AUD, NZD and EUR where the USD is the counter currency (e.g. GBPUSD, AUDUSD, NZDUSD, EURUSD).
  • The quotation EUR/USD 1.2366 means 1 EUR = 1.2366 USD, so:

    • If the EUR/USD quote changes from 1.2366 to 1.2376, EUR has increased in relative value(either USD has weakened or EUR has strengthened, or both)
    • If the EUR/USD quote changes from 1.2366 to 1.2350, EUR has decreased in relative value(either USD has strengthened or EUR has weakened, or both)
  • The factors affecting the currency XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.

  • The most traded pairs are called the Majors(EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD and USD/CAD). They constitute the largest share of forex market and have high liquidity.

  • **Widely Traded Currency Pairs(created from the eight major currencies (USD, EUR, GBP, JPY, CHF, CAD, AUD, NZD)**

    SymbolDescription
    EUR/USDEuro/U.S. Dollar
    GBP/USDBritish Pound/U.S. Dollar
    USD/JPYU.S. Dollar/Japanese Yen
    USD/CHFU.S. Dollar/Swiss Franc
    EUR/JPYEuro/Japanese Yen
    EUR/GBPEuro/British Pound
    EUR/CHFEuro/Swiss Franc
    GBP/JPYBritish Pound/Japanese Yen
    GBP/CHFBritish Pound/Swiss Franc
    NZD/USDNew Zealand Dollar/U.S. Dollar
    AUD/USDAustralian Dollar/U.S. Dollar
    USD/CADU.S. Dollar/Canadian Dollar
    AUD/JPYAustralian Dollar/Japanese Yen
    NZD/JPYNew Zealand Dollar/Japanese Yen
  • Less Widely Traded Currency Pairs

    SymbolDescription
    EUR/DKKEuro/Danish Krone
    USD/SEKU.S. Dollar/Swedish Krone
    USD/SGDU.S. Dollar/Singapore Dollar
    EUR/RUBEuro/Russian Ruble
    EUR/SEKEuro/Swedish Krone
    CAD/CHFCanadian Dollar/Swiss Franc
    NZD/CADNew Zealand Dollar/Canadian Dollar
    USD/HKDU.S. Dollar/Hong Kong Dollar
    USD/CNYU.S. Dollar/Chinese Yuan
    USD/DKKU.S. Dollar/Danish Krone
    USD/BRLU.S. Dollar/Brazilian Real
    USD/MXNU.S. Dollar/Mexican Peso
    USD/RUBU.S. Dollar/Russian Ruble
    GBP/NZDBritish Pound/New Zealand Dollar
  • Major Currencies, Corresponding Central Banks & Nicknames

    CurrencySymbolCentral Banknickname
    EuroEUREuropean Central Bank, ECBSingle Currency
    U.S. DollarUSDFederal Reserve, FedGreenback, Buck
    Swiss FrancCHFSwiss National Bank, SNBSwissy, Chef
    Japanese YenJPYBank of Japan, BoJYen
    British PoundGBPBank of England, BoESterling
    Canadian DollarCADBank of Canada, BoCLoonie
    Australian DollarAUDReserve Bank of Australia, RBAAussie
    New Zealand DollarNZDReserve Bank of New Zealand, RBNZKiwi
  • Less Widely Traded Currencies. Don’t ignore these currencies, sometimes there are great opportunities.

The chart track the base currency #

The direction of the exchange rate is based on the base currency. If the base currency is gaining vs. the quote or counter currency, the chart will moving up,vice versa. The chart below illustrates the EUR/USD currency pair.

  • left side: The exchange rate is moving higher. This means that EUR (base currency) is rising vs. USD or USD (counter currency) is falling vs. EUR.
  • right side: The exchange rate is moving lower. This means that EUR (base currency) is falling vs. USD or USD (counter currency) is rising vs. EUR.

Lot size #

Currencies are traded in fixed contract sizes(lot sizes). One lot is the unit of measurement (in terms of size) for a currency pair.

  • One Standard Lot = 100,000 Units of the Base Currency
  • One Mini Lot = 10,000 Units of Currency
  • One Micro Lot = 1,000 Units of Currency
  • One Nano Lot = 100 Units of Currency

Pip value #

One pip is the unit of measurement (in terms of price or value) for a currency pair.

  • One pip EUR/USD (Standard Account) = $10 USD
  • One pip EUR/USD (Mini Account) = $1 USD
  • One pip EUR/USD (Micro Account) = 10 cents USD
  • One pip EUR/USD (Nano Account) = 1 cent USD

Pip calculation #

The value of a pip is determined by the counter or quote currency(the second member of the currency pair), and has a fixed value in that currency. For example:

The value of 1 pip of EUR/USD:

  • In a standard account: EUR/USD pip = 0.0001 × 100,000 = USD $10.00 per pip
  • In a mini account: EUR/USD pip = 0.0001 × 10,000 = USD $1.00 per pip
  • In a micro account: EUR/USD pip = 0.0001 × 1,000 = USD $0.10 per pip
  • In a nano account: EUR/USD pip = 0.0001 × 100 = USD $0.01 per pip

The value of 1 pip of USD/CHF

  • In a standard account: USD/CHF pip = 0.0001 × 100,000 = CHF 10.00 per pip (One pip of USD/CHF is worth 10 CHF)
  • In a mini account: USD/CHF pip = 0.0001 × 10,000 = CHF 1.00 per pip
  • In a micro account: USD/CHF pip = 0.0001 × 1,000 = CHF 0.10 per pip
  • In a nano account: USD/CHF pip = 0.0001 × 100 = CHF 0.01 per pip

First currency = 1 Think of base currency as the number 1. For example, if the quote for EUR/USD is 1.5675, it means that 1 euro equals 1.5675 U.S. dollars.

  • If EUR/CHF exchange rate is 1.4000, then 1 EUR = 1.4 CHF
  • If GBP/USD exchange rate is 1.6160, then 1 GBP = 1.616 USD
  • If AUD/NZD exchange rate is 1.3650, then 1 AUD = 1.365 NZD
  • If USD/JPY exchange rate is 107.90, then 1 USD = 107.9 JPY

The pip value of USD/CHF fluctuates when it is calculated in terms of the base currency (the first member of the currency pair). For example,

  • One pip of USD/CHF is worth 10 CHF (fixed value)
  • If the USD/CHF exchange rate is 1.1400, then 1 USD=1.1400 CHF. 10 CHF= 10 divided by 1.1400 = $8.771 USD. One pip of USD/CHF is worth $8.771 USD.
  • If the USD/CHF exchange rate is 1.1100, then 1 USD=1.1100 CHF. 10CHF= 10 divided by 1.1100 = $9.009 USD. One pip of USD/CHF is worth $9.009 USD

Position: Long, Short, Flat #

Long = a position that will benefit if the exchange rate rises Short = a position that will benefit if the exchange rate falls Flat = absence of a long or short position

Position vs Trade Your current position(long, short, or flat) is the result of the trades you have placed. For example,suppose you place a trade to buy 5 lots of EUR/USD, and 30 minutes later, you place another trade to buy 2 lots of EUR/USD. In this case, you had 2 trades, and a long position of 7 lots of EUR/USD.

Long and Short vs Buy and Sell

  • Long and short are more precise than buy and sell.
    • Long only means a position that will benefit if the exchange rate rises
    • Short only means a position that will benefit if the exchange rate falls

Buy can mean different things. Suppose you want to buy EUR/USD.This could mean

  • You want to open a long position because you think the EUR/USD will move higher.
  • You’ve short EUR/USD and you’re buying to close that position.

Sell can mean different things. Suppose you want to sell EUR/USD.This could mean

  • You want to open a short position because you think the EUR/USD will move lower.
  • You’ve long EUR/USD and you’re selling to close that position.

Long one, short the other #

When a Forex trader long a currency pair, he/she is long the base currency and short counter or quote currency:

  • Long USD/CAD -> long the USD and short the CAD
  • Long NZD/USD -> long the NZD and short the USD
  • Long EUR/USD -> long the EUR and short the USD

Conversely, when a trader shorts a currency pair, he/she is short the base currency and long the counter or quote currency:

  • Short USD/CHF -> short the USD and long the CHF
  • Short GBP/CHF -> short the GBP and long the CHF
  • Short AUD/JPY -> short the AUD and long the JPY

As traders, we usually think of each currency pair as a single unit, just like a stock.For example, When we believe the price of a currency pair or a stock is going to rise, we would open a long position, vice versa.

In fact, we are trading the exchange rate between currencies because an individual currency can not rise and fall, it can only fluctuates in relation to other currencies. We often call the exchange rate the price of the currency pair.

Margin Requirement and Leverage #

Margin: the deposit that’s required to open or maintain a position.

  • Used margin: the amount that’s being used to maintain or open a position
  • Usable margin: the amount available to open new positions or add to existing positions

Leverage. e.g. 100:1 leverage. With a $1,000 margin balance in your account and a 1 percent margin requirement, you can buy or sell a position worth $100,000.

Note that most forex brokers will close all open trades automatically when the margin balance falls below the amount required to keep the positions open. If not, traders might lose more than the money they have in their account because of leverage.