Forex guide

The forex market is a fast-moving, complex place. That’s why it’s important to understand all the key terminology. Once you’ve cracked the essentials, there’s a wealth of opportunities waiting for you.

What are currency pairs?

Currency pairs demonstrates the value of one currency compared to another. The first currency in the pair is the base currency and the second is the quote currency. Currency pairs show how much of the quote currency is needed to buy one unit of the base currency. In the forex market, you can find currency pairs for almost any country’s currency, but the most common are the Euro, the British pound, the US dollar, the Japanese yen, the Australian dollar, the Canadian dollar and the Swiss franc.

Example

The US dollar and the Japanese yen – shown as USD/JPY – is 100. That means it takes ¥100 to buy $1.

Majors, exotics, minors

Some traders focus on major currency pairs, but others concentrate on minor or even exotic currency pairs. At Q8 Trade, you can choose whatever pairs you want – we’ve got a huge range of major, minor and exotic currency pairs.

Forex trade example

Forex trading means speculating that one currency will get stronger or weaker compared to another. To trade on the forex market, you can use a forex broker and trade directly or use a CFD contract or a spread bet.

When you’re trading with a broker, you’d simply go long or short on a currency pair. For example, the EUR/USD is quoted at 1.3500 and you think the euro will get stronger versus the dollar, so you go long on the currency pair. There’s typically a spread involved in direct forex trades, so your trade begins with a small loss. With this pair, each pip is worth $10 when trading a full contract. So if the pair rises to 1.3600, you’ll make a $1,000 profit (minus the small spread).

Lots

A standard forex lot is equal to 100,000 units of the base currency. That means for EUR/USD, a standard lot is €100,000 and for USD/JPY, a standard lot is $100,000. There are also mini-lots, equal to 10,000 units, and micro-lots, equal to 1,000 units.

Pips

The smallest unit of a currency pair, a pip is usually equal to one ten-thousandth of the pair. This is because currency pairs are typically quoted to four decimal places. That means a change from 1.3500 to 1.3501 is a 1 pip change. If you’re trading a lot where USD is the base currency, a pip is worth roughly $10. The value of a pip changes with each currency pair, but when the US dollar is the quote currency, a pip is always worth $10.

Example

To get the value of a single pip in a currency pair, a trader divides 1 pip (i.e. 0.0001) by the current exchange rate and multiply it by the notional amount (the contract amount) of the trade. So if EUR/USD is 1.3500, the calculation is: ((0.0001 / 1.3500) * 100,000). That means 1 pip is €7.407 or $10.

Spreads in forex

Spreads in forex are not the same as fees or commission – the trader doesn’t pay the spread to the broker as a separate cost.

When a broker quote the price of a forex pair, they quote an ask price and a bid price. The ask price is the cost to purchase a contract and the bid is the cost to sell a contract. The difference between the two is known as the spread. This means that any time a forex contract is purchased or sold, the trader has a loss equal to the spread.

In very liquid pairs – such as the EUR/USD – the spread can be less than 1 pip. Minor and exotic pairs have less liquidity, so their spreads can run to dozens of pips.

If the currency pairs move in the direction you expect, you don’t have to pay the spread

 

 

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