The Basics of Forex Trading

The Foreign Exchange or Forex or Fx is the global market where governments, banks, corporations, and traders meet to exchange currencies. 


What is the Foreign Exchange or Forex market?

The currency market is the world’s largest and most liquid financial market with average daily turnovers of over 4 trillion US dollars.

These are some facts regarding the Forex Market:

-The Forex market is open 24/5

-The most important currency trading centers are London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, and Singapore

-Currency trading is using the ECN network (Electronic Communicational Network)

-The most traded currency is the US Dollar and the most traded pair is EURUSD


Different Instruments for Trading Forex Currencies

Forex currencies can be traded using a wide number of different financial instruments:

  1. Spot transactions
  2. Futures Contracts
  3. Currency Forwards
  4. Currency Swaps
  5. Currency Option Contracts (American European, Binaries, etc.)
  6. CFDs (Contract for Difference)

There are more than 100 different currencies worldwide

There are more than 100 different currencies worldwide. However, most transactions involve four (4) currencies (US Dollar, Euro, Yen, and the British Pound Sterling). Other key currencies include the Swiss Franc, the Australian dollar, the Canadian dollar, and the New Zeeland Dollar.


Forex Trading Basic Terms

These are the basic terms when trading Forex:


A currency pair includes two currencies and shows the value of a currency by its comparison to another currency.


A base currency is the first currency quoted in a currency pair. For example, EUR is the basic currency of the EURUSD pair.


A quote currency is the second currency quoted in a currency pair in forex. For example, USD is the quote currency of the EURUSD pair.

  • PIP

Pip is the smallest price change of an exchange rate. As most Forex pairs are priced to four decimal places (0.0000), the smallest price change happens to the last decimal point (0.0001). That means 1 pip equals 0.0001. Note that the smallest price change in Forex pairs including the Japanese Yen (JPY) is the second decimal point (000.01).


The Forex Majors are the most traded Forex pairs including the US Dollar (EURUSD, USDJPY, GBPUSD, USDCHF, USDCAD, AUDUSD, and NZDUSD)


Cross currency pairs or else Forex crosses are currency pairs that do not include the US dollar. For example, EURGBP, EURJPY, GBPJPY, and EURCHF.


The Basics of Forex Trading