This tutorial is especially designed for Forex beginners to have the overall knowledge of Forex basics in a simple and easy way. By going through the tutorial you will be able to excel your knowledge in the following areas.
- Identifying pair categories - Majors/Crosses/Exotics
- Knowing currency nicknames
- Learning to read quotes
- What is PIP & how to calculate it?
- What is Spread?
- Leverage and its use
- Factors affecting currency rates
You cannot ride high if you don’t know the basics of anything. That applies to Forex as well. If you know Forex basics, that will lead you to Forex success. OK. Then where to begin from? First let’s have a look at the currency pairs used in Forex. Usually the currency pairs are given with a “/” mark between two currencies.
Eg. USD/JPY, USD/CAD, GBP/USD etc.
These pairs are mainly divided into three main categories such as Majors, Crosses and Exotics.
Majors are the most traded currency pairs in Forex. They reserve the largest shares of the foreign exchange market.
Crosses do not include U.S dollar in the pair.
Crosses are pairs traded in forex which do not include U.S dollars in any side of the pair. When trading crosses, a trader does not need to swap the currency into U.S. dollars first. There are only one transaction reading crosses means it only crosses one spread.
Exotics are a type of currencies of developing/emerging countries. Exotic currency values mostly depend on its own countries political situation.
Exotics are illiquid and traded in low volumes. When trading, bid-ask difference(spread) is usually large. Exotics cannot trade in standard brokerage accounts easily. Investors need higher margins in their brokerage accounts to trade exotics.
Forex Currency Nicknames
When you are trading, you will find some names used for the previously said currencies and pairs. For instance, “Cable” for GBP/USD and “Fiber” for EUR/USD etc. The reason as to why these pairs called different names (nicknames) is because they have their own stories behind them.
If we take the same example about “Cable” for GBP/USD, the origin of reason as to why it’s called as “Cable” runs back to 19th century. Those times, the exchange rate between US dollars and British Pounds had been transmitted via a large cable running under the sea. And that has made the exchange rate be referred to as cable.
There isn’t one or two nicknames, but many. Below are such nicknames used to name other currency pairs.
|EUR/JPY||Euppy(Pronounce as Yuppy )|
|EUR||Fiber / Single currency|
How to read quotes
There is a currency quotation always use in Forex as you see currencies as pairs. When you buy or sell a currency, another type of currency is in the other side exchanging with the first. Using this phenomenon a value of a currency states by its comparison with another currency.
PIP- Price Interest Point
A pip is the smallest amount of change in exchange rates of any pair of currencies. Since exchange rates of Major currency pairs valued to fourth decimal place, the smallest change is that of the last decimal place.
1.1300 = Current exchange rate of EUR/USD
0.0001 = PIP in 4th decimal place
100 000 = Notional value take as 100 000 for a standard lot
Each currency pair has a bid price and an ask price. Bid price is always lower than the Ask price.
Bid price comes when you sell base currency in exchange to quote
currency.Ask price comes when you buy base currency in exchange to the quote currency.
Simply, “Ask” is the price you get from the trade and the “Bid” is the price you pay for the trade.
Spread is the difference between Ask and the Bid. It is the pip difference quoted up to 4th decimal place.
WHAT INFLUENCES CURRENCY RATES OF A COUNTRY
- Central Bank of the relevant country
- National Economy
- Political Situation and Stability
- Government Debt
- Change in Inflation
- Change in Interest rates
This is about borrowing the amount of money that falls short to proceed with Forex Trading.
In forex you can start trading and invest a smaller amount of money comparing to other investment strategies. But when trading higher positions you need to borrow money from another. Therefore, you can borrow money from your broker as a loaning process.
There are options in leverage as follows,
What this means?
Imagine you go for 1:100, it means that you are going to borrow USD 100 (Depending on your choice of currency for your transaction) for a USD 1 you plan to invest. So there’s always an option to maximize your profits through these leverage process.
For example: To open a USD10,000 position you can use an investment margin of USD 100 with a leverage of 1:100 (USD 100 X 100= USD 10,000) So in a profit, you can have 100 times more profits than the profits you could gain with USD 100. But the risky part is, the same process applies to losses as well.
Note: The higher the leverage you go for the higher risk you take and higher the risk you take the higher the profits will be if played right.