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“Forex” means “foreign exchange” and refers to the buying or selling of one currency in exchange for another. It is the most traded market in the world because people, businesses and countries all participate in it, and it is an easy market to access with very little capital. When you travel and convert your US dollars into Euros, you are participating in the global foreign exchange market.
At any given time, demand for a particular currency will push it up or down in value relative to other currencies. Here are some basics about the currency market so you can take the next step and start forex trading.
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When you exchange US dollars for euros, two currencies are involved, so the exchange always shows the value of one currency against the other. The EUR/USD price, for example, tells you how many US dollars (USD) are needed to buy one euro (EUR).
The Forex market uses symbols to designate specific currency pairs. The euro is denoted by EUR, the US dollar is USD, so EUR/U.S. A dollar pair is shown as EUR/USD. Other commonly traded currency symbols include AUD (Australian dollar), GBP (British pound), CHF (Swiss franc), CAD (Canadian dollar), NZD (New Zealand dollar), and JPY (Japanese yen).
Each forex pair will have a market price associated with it. The price shows how much of the second currency it takes to buy one unit of the first currency. If the price of the EUR/USD currency pair is 1.3635, it means that it costs 1.3635 US dollars to buy one euro.
To find how many euros it costs to buy one US dollar, flip the pair to USD/EUR: divide 1 by 1.3635 (or whatever the current rate is). In this case, the result is 0.7334. It costs 0.7334 euros to buy one USD based on the current market price. The price of the currency pair is constantly changing, as transactions take place around the world, 24 hours a week.
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Learning to trade forex involves learning a little bit of new terminology that describes the price of currency pairs. Once you understand this and how to calculate your trading profit, you are one step closer to your first currency trade.
Most currency pairs move about 50 to 100 pips per day (sometimes more or less depending on overall market conditions). A pip (abbreviation for “point in percent”) is the name used to represent the fourth decimal place in a currency pair, or the second decimal place when the pair contains JPY. When the EUR/USD price moves from 1.3600 to 1.3650, it is a 50 pip move; If you bought the pair at 1.3600 and sold it at 1.3650, you would make a profit of 50 pips.
The profit you made on the theoretical trade above depends on how much currency you bought. If you bought 1,000 units in USD (called “microlots”), each pip costing $0.10, you would calculate your profit as 50 pips x $0.10 = $5 for a 50 pip profit. If you bought 10,000 units (“small trees”), each pipe is worth $1, so your profit is $50. If you bought 100,000 units (the “standard load”), each pipe costs $10, so your profit is $500.
How much each pipe costs is called the “pipe value”. For any pair where USD is listed second, the above pip values will apply. If USD is listed first, pip value may be different. To get the USD/CHF pip price, for example, divide the normal pip price (mentioned above) by the current USD/CHF exchange rate. This is worth $0.10/0.9435 = $0.1060, where 0.9435 is the current price of the pair. For JPY pairs (USD/JPY), go through the same process, but then multiply by 100.
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For trading purposes, the first currency listed in a pair is always the leading currency on a forex price chart. If the price is rising on EUR/USD, it means that the Euro is rising against the US Dollar. If the price on the chart is falling, then the value of the euro is falling against the dollar.
One of the best ways to learn about forex is to see how prices move in real time and make some fake trades with an account called a “paper trading account” (so you have no real financial risk). Some brokers offer paper trading accounts based on online or mobile apps that work just like live trading accounts, but without risking your own capital. There are many online simulators to practice day trading and improve your forex trading strategy and skills.
Understanding the above concepts will help you understand what is happening when you see a forex pair rising or falling on the chart. Calculating the difference in pip between two price points will also help you see the profit potential available from such moves.
There are forex exchanges all over the world, so forex is traded 24 hours a day during the week. The forex market opens at 5 p.m. EST on Sunday, and closes at 5 p.m. EST on Friday.
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“Spread” usually refers to the difference between the bid (buy) price and the ask (sell) price. Brokers will make some distinctions as to how they profit from the trades they help execute. The more liquid and stable a currency pair is, the smaller the spread. Highly volatile pairs with low liquidity will have wide spreads.
“Spread trading” can also refer to a strategy where you make long and short trades of the same type at the same time. This allows you to take a slightly bearish or slightly bullish position which limits your losses and potential upside.
“Scalping” refers to the shortest time frame of the trade. This is a strategy that can be used in any market, be it forex, stocks or futures. Scalpers exit the trade immediately after the trade becomes profitable. This usually only takes a few minutes or seconds.
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