At 4xincome, 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?
What is the forex market?
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.
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.
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.
Trades & Key Terminology
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.
What are the most traded currency pairs on the forex market?
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.
NEED TO KNOW MORE?
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.
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