Foreign Exchange Market: The Basics

    Traditionally, the Forex market has been the domain for banks, institutions and governments. But in 2018, more and more retail traders are moving to the Forex markets for the outstanding investment opportunities available.

    After all, the Forex markets are the largest, most liquid markets in the world, turning over $US5 trillion a day.

    In this article, we are going to cover the basics of the Foreign Exchange Market.

    forex-investment-basics

     

    An introduction to Forex pairs

    When it comes to trading Forex, you will notice all prices are quoted in pairs.

    You have the Euro vs the US dollar, the British Pound vs the US dollar, the Japanese Yen vs the US dollar and so on.

    When trading Forex, you are always buying one currency and selling the other.

    Prices are quoted according to the base currency and counter currency.

    The first price is called the base currency, and the 2nd part is called the counter currency.

     

    Majors and Minor FX pairs

    Forex pairs are broken up into majors and minor FX pairs.

    A major is a currency pair that involves the USD on one side of the quote.

    The key Forex majors are:

    • EUR/USD
    • GBP/USD
    • USD/JPY
    • USD/CHF
    • USD/CAD
    • AUD/USD
    • NZD/USD

    A minor FX pair or Forex cross is a pair without the US dollar involved.

    Here are some examples of FX minor pairs.

    • EUR/GBP
    • GBP/CHF
    • GBP/JPY
    • CAD/JPY
    • AUD/JPY
    • GBP/AUD
    • CAD/CHF

    You also get Forex exotics. Forex exotics are thinly traded FX pairs and are often very volatile. Examples of exotics are USD/NOK and USD/MXN.

    Lots, Mini and Micro Contracts 

    Lots, Mini and Micro Contracts Explained

    You must know your lot sizes when it comes to trading Forex.

    Imagine placing a trade which you think is for $50,000, but you accidentally place it for $500,000. Positions sizes get out of hand quickly when it comes to making mistakes in the Forex markets.

    • A full lot in Forex is the equivalent of 1 full contract which is equal to $US100,000.
    • A mini contract is 1/10th the size of a full contract and is equal to $US10,000.
    • A micro contract is 1/10th the size of a mini contract and is equal to $US1,000.

    Most Forex brokers allow you to trade as little as one micro contract.

    Having the flexibility in trading $US1,000 increments is ideal for those who understand and can use advanced money management and position sizing rules.

     

    What is a Pip?

    A pip used to be known as the smallest price increment an FX pair can trade in. That was when brokers showed quotes to 4 decimal places.

    But now, every broker shows the currency price to 5 decimal places.

    So, a pip is the tick movement at the 4th decimal place.

    A one pip movement on the Eurodollar would be when the price moves from 1.3175 to 1.3176.

    • A 1 pip movement on a full lot is $US10 per pip
    • A 1 pip movement on a micro lot is $US1 per pip
    • A 1 pip movement on a mini lot is $US0.10 per pip

    Now you have the Forex basics explained.

    We welcome you to give our team a call to discuss your investment goals and objectives.

    You can call Walker Capital Australia on +61 2 8076 2210, and we’ll see how we can help you achieve your investment goals.

    Or for more information on currency investing, check out our full article: 7 Key Reasons Why Australians Invest In The Currency Markets.