Trading Forex Currency Pairs
The Forex market, also commonly referred to as FX or Foreign Exchange is the trading of currencies in pairs by the simultaneous selling of one currency and buying the equivalent in another currency. Forex is by far the most liquid market in the world with daily trading volumes in excess of $4 Trillion. The market is referred to as OTC (Over The Counter) as there is no central exchange, rather the market is made up of brokers, retail and institutional traders and investors, banks and hedge funds.
Forex prices are always quoted in pairs and the quote is essentially the exchange rate between the two currencies.
To illustrate this, let’s look at one of the most highly traded FX pairs, the EURUSD.
EURUSD is the short form for the EUR (European Union Euro) and the United States Dollar. What the quote tells us is how many United States dollars we need to buy one Euro. So, if the quote is:
EURUSD – 1.18130
This tells us that that to buy one Euro, we need 1.18130 United States Dollars.
The first currency in the pair is known as the Base (in this case the EUR) and the second currency in the pair is known as the Quote (in this case the USD).
On broker platforms, two prices are quoted for each currency pair.
The Bid price, which is the price to Buy the pair, and the Ask, which is the price to Sell the pair.
On the EuropeFX platforms, the price for the EURUSD would look something like this
The difference between the two prices is known as the Spread and is the price we charge for trading on our platforms.
EuropeFX is a 5-digit broker, allowing for fractional pricing and tighter spreads.
Trading Forex currencies is done in fixed amounts, known as Lots.
A Standard Lot is equal to 100,000 units of the base currency
Trading can also be done in Mini Lots, which are equal to 10,000 units of the base currency, and Micro Lots which are equal to 1,000 units of the base currency.
Realizing a profit from trading forex currencies involves opening a trade in one direction, then closing the trade in the opposite direction. That is to say, we can choose to buy a currency pair (expecting the price to rise) and then sell this currency pair at the higher price, benefiting from the difference in price.
The process of opening and closing a trade is known as a Round Trip.
Let’s take a look at our EURUSD example and see the whole process in action.
Believing the value of the EUR will rise against the USD, we buy One Lot of EURUSD at 1.20000 (to keep the numbers simple). We now have 100,000 EUR in our balance and owe the markets the equivalent in USD, in this case, 120,000.
To realize a profit, we are expecting the EUR to rise, so we can close out our position with a gain.
At 1.20000, we would have 100,000 EUR in our balance, with the 120,000 USD owing to the markets.
The price rises to 1.30000. We close the position by selling our one Lot of EURUSD for a profit of 10,000 USD.
However, if the price moved against our expectation and fell to 1.10000, then our USD balance for the one Lot of EURUSD we purchased would be 110,000, for a loss on the trade of 10,000 USD, if we chose to close the trade at that moment in time.
Forex currencies are traded on Leverage, which is essentially a “loan”. Leverage multiplies your effective trading funds and can lead to increased profitability in the event of a successful trade. However, Leverage can also work against your trades, resulting in increased losses in the event of unsuccessful trades.
On EuropeFX leverage can go as high as 1:500, increasing your effective trading balance by a factor of 500. Deposit $1 and your effective trading balance is $500.
Used with care leverage can be an extremely useful tool. Used carelessly, leverage can increase your risk of magnified losses.
The complete list of forex pairs available at EuropeFX can be found in our asset index.