Forex Currency Pairs
So now that we have gone over some of the basic stuff, let’s now delve into how Forex actually works. By the end of this section, you will have a better understanding of how Forex is traded. In the previous section I mentioned that we are trading Currencies as Pairs in Forex, this is because you are basically buying one currency whilst selling the other.
We also looked at some of the more popular Currencies and their abbreviations. Let’s take a look at some Currency Pairs below:
GBP/USD – The British Pound against the US Dollar
AUD/USD – The Australian Dollar against the US Dollar
USD/JPY – The US Dollar against the Japanese Yen
EUR/USD – The Euro against the US Dollar
The first currency in the pair is known as the Base Currency, the second currency in the pair is referred to as the Counter Currency. So the Base Currency in USD/JPY is the US Dollar, the Base Currency in the GBP/USD is the British Pound, the Counter Currency in USD/JPY is the Japanese Yen.
What makes up a Forex Trade
Before you can understand how a Forex Trade works, you need to know the key elements that make up a Forex Trade.
The Current Price
So, each Currency Pair is given a price, this price shows how much a single unit of the Base Currency will buy of the Counter Currency. So let’s take the EUR/USD as an example.
Let’s say you see the EUR/USD = 1.35827
This means that One Euro is currently worth 1.35827 US Dollars ($1.35827).
Long or Short
When you place a trade you are either Buying or Selling, based upon which way you believe the market will move, will it go Long (UP) or will it go Short (DOWN).
If you believe the market will go Long (UP) then you BUY.
If you believe the market will go Short (DOWN) then you SELL.
So, if I had a buy position on the EUR/USD, I would be LONG on the EUR/USD and if I had a sell position, I would be SHORT on the EUR/USD. It really is that simple.
Bid/Ask Price and Spreads
When placing a trade you will be presented with a Bid Price (The price at which you can SELL) and an Ask Price (The Price at which you can BUY). Some brokers will simply refer to this as the BUY Price and the SELL Price.
Above we can see:
The current Sell Price for the EUR/USD is 13581.8
The current Buy Price for the EUR/USD is 13583.3
The difference between the two is 1.5 (as shown just underneath the prices), this is known as the Spread. The Spread is how the broker makes their money, as traders enter the market and trade.
When you enter a trade you will never enter at break-even, you will have to make up the Spread in order to hit break-even and then anything above that will be your profit.
Each movement up or down of a given Forex Currency Pair, is measured in PIPS (Percentage in Point), it is also sometimes referred to as Points. As some Currency Pairs differ from others, what they count as a PIP movement will vary.
Let’s look at a few EUR/USD examples:
A movement from 13581.5 to 13582.5 is a movement of 1 PIP.
A movement from 13582.5 to 13588.7 is a movement of 6.2 PIPS.
A movement from 13588.7 to 13588.4 is a movement of -0.3 PIPS.
The digits highlighted in red, indicate what a PIP movement in this particular Currency Pair is defined as. Notice the last example is a minus number (–0.3), this is due to the fact that the Price moved down in that last example (13588.7 down to 13588.4), this would be advantageous for us if we were in a short position, as the market would be moving in a our favour (down).
Now do not worry if you feel like this is all too much information, by the end of this Forex Beginner Course everything will come together, and you will have a far greater understanding of Forex Trading and so a far greater chance of success.
This concludes Lesson 2, Forex is traded by these different elements, they are in fact what make-up a Forex Trade. In Lesson 3, we will be continuing our education by looking at PIPS in more detail and how we work out our Profit from these PIPS, when we enter a trade.
See you on the next one!