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What is Forex Trading?
‘Forex’ or ‘FX’ derives from ‘Foreign Exchange’. It is a decentralized global market where traders are able to buy and sell currencies. It is the largest and most liquid market in the world, with an average daily trading volume worth over $5 trillion.
When a person travels from one country to another, it is usually required to convert money to the currency that is used in the country that they are travelling to. For example, when a resident of the United States travels to Italy, he/she is required to exchange their US dollars to the Euro currency.
In the same way, an international firm is sometimes required to exchange currencies in order to pay employees that are located overseas. The exchange rate fluctuates continuously as it is based on supply and demand. Therefore, this determines how much of currency A will be required in order to obtain currency B. Depending on the price, it is sometimes advisable to wait for a more favorable rate as it can make a big difference when a large amount of exchange is concerned.
In Forex, currency pairs can be traded without physically owning currencies. In addition, a profit or a loss can be made from both upward and downward market trends.
Major currency pairs contain the US Dollar, generally have the lowest spreads and are the most liquid instruments. Cross currency pairs are traded against each other excluding the US dollar (ex: CADJPY, EURAUD…).
Below are some examples of what we call major currencies:
EUR/USD Euro Zone/United States
USD/JPY United States/Japan
GBP/USD United Kingdom/United States
USD/CAD United States/Canada
USD/CHF United States/Switzerland
AUD/USD Australia/United States
NZD/USD New Zealand/United States
In Forex, certain currency pairs have their own terminology:
| Symbol | Currency pair | Terminology |
| GBPUSD | British Pound & US Dollar | Cable |
| EURUSD | Euro & US Dollar | Euro |
| USDJPY | US Dollar & Japanese Yen | Dollar Yen |
| USDCHF | US Dollar & Swiss Franc | Dollar Swiss or Swissy |
| USDCAD | US Dollar & Canadian Dollar | Dollar CAD or Loonie |
| NZDUSD | New Zealand Dollar & US Dollar | Kiwi |
| AUDUSD | Australian Dollar & US Dollar | Aussie Dollar |
| EURGBP | Euro & British Pound | Euro Sterling |
| EURJPY | Euro & Japanese Yen | Euro Yen |
When trading Forex (for example the EURUSD), the first currency EUR is called the ‘base currency’, which represents the direction and the second currency is called ‘counter or quote currency’ which indicates the profit or loss.
- Market is open 24/5
- High liquidity
- More trading capacity thanks to leverage
- Possibility to profit/lose whichever way the market moves (upwards or downwards)
- More chances of limiting risks by the use of stop loss orders and risk management strategies
- Forex can be more predictable with the study of technical and fundamental analysis
- Trading is available via several trading platforms; desktop, mobile, web.
- Trades can be automated or semi-automatic (EA)
Forex can be traded based on margin and is determined by the contract size, leverage, pip value and direction.
For short positions, client opens a trade based on the ‘Bid’ price and closes the position based on the ‘Ask’ price.
For long positions, client opens a trade based on the ‘Ask’ price and closes the position based on the ‘Bid’ price.
Note: Trading of Forex may involve other fees.
1 lot of EURUSD = 100,000 EUR
Pip value of EURUSD = 10$
Account leverage 1:50 / Margin requirement 2%
Required margin to open 1 lot of EURUSD is 2% x 100,000 = 2000$
Client decides to go long on EURUSD:
Opening of position based on ‘Ask’ Price: 1.17200
Closing of position based on ‘Bid’ Price: 1.17500
Difference in price = 1.17500 – 1.17200 = 0.003
100,000 x 0.003 = + 300$ (profit)
Client decides to go short on EURUSD:
Opening of position based on ‘Bid’ Price: 1.17200
Closing of position based on ‘Ask’ Price: 1.17500
Difference in price = 1.17200 – 1.17500 = – 0.003
100,000 x – 0.003 = – 300$ (loss)