It is critical to observe the movement of prices in Forex trading. There are several ways to accomplish this, including seeing the ticker in real-time. But the most popular method is to display prices on a chart, which enables you to observe how prices respond at crucial moments.

Traders use prominent chart types, including line charts, candlestick charts, and bar charts. Each chart type presents data uniquely and has distinct advantages.

Line Charts

Line charts are the most straightforward to understand, primarily because line charts only display closing prices. Thus, they eliminate “noise” generated by less crucial trading times of the day, such as the open, high, and low. Line charts typically depict a single line that connects all of the period’s closing values – the following is an example of how the XAUUSD daily line chart looks:

Since closing prices are often seen as the most relevant, it’s easy to see why investors and traders like line charts.

Line charts provide a concise, simplified snapshot of the current market condition and are typically the best choice for individuals seeking a fast glimpse of the market’s direction.

Bar Charts

Bar charts, commonly called OHLC charts, depict four critical points: the Open, High, Low, and Close (OHLC) of a given period. Consider it an enhanced version of the line chart, as it reveals additional information that can be used to aid in trade research and uncover additional information about specific price moves.

For instance, if the space between the Open and Close bars is vast, it indicates that the price made a significant move during that bar. Combining a few of these might indicate a period of extreme volatility.

Not only can you see how prices are displayed in terms of bars in the same XAUUSD chart example above, but you can also see how there are periods of high and low volatility. This is very important in trading because it identifies periods and locations of high interest and indecision.

Candlestick Charts

The candlestick chart is the most popular type of chart. Candlestick charts are composed of two distinct components: the body and the shadows (wick). The top and bottom of the body provide information about the opening and closing prices over the specified period. The shadows at the top and bottom indicate the highest and lowest prices reached within the specified period.

Candlestick charts, like bar charts, display the Open, High, Low, and Close in a different format. Indeed, many traders regard the candlestick chart as an enhanced version of the bar chart, as the additional information displayed allows for the creation of candlestick patterns (more on that later), which enables us to read the markets in ways that bar charts and line charts do not.

Typically, the candle body will be red if the closing price is less than the opening price. The body will be green if the closing price exceeds the opening price. In this scenario, red candlesticks indicate a price decline, while green candlesticks indicate a price increase.

Using the same XAUUSD example, you can observe how prices seem different on a candlestick chart.

Important note: While red and green are typical colours for displaying falling and rising values, additional combinations such as black/white or blue/orange (like the sample below) may exist.

The most important thing is to know why they are formed so that the colours representing them can make it easier for us to figure out what they mean.

When it comes to trading, you’ll likely often hear about MT4. What is it exactly?

MetaTrader4 (MT4) is a popular online trading platform that traders can use to automate their trading. Its simple user interface gives access to advanced technical analysis and flexible trading systems.

Here’s a guide on what MetaTrader 4 is and how to use it.

MT4 is an acronym for MetaTrader 4, one of the world’s most widely used trading platforms for Forex trading. Indeed, you may trade a wide variety of items on it, including:

• Indices (such as S&P 500, Nasdaq, etc.)
• CFDs on shares (such as Apple, Netflix, Tesla, and Amazon)
• Commodities (such as Soybean, Coffee)
• Precious Metals (such as Gold, Silver, Platinum, and Copper)
• Bitcoin and other cryptocurrencies (such as BTCUSD and ETHUSD)

MT4 includes all of the standard trading platform functionalities you’d expect, including products/symbols, various chart types and customization options, useful entry options, and comprehensive and accurate historical trade tracking. It also features a handy back tester for evaluating how different trading strategies would have performed against historical data.

Most importantly, it’s effortless and straightforward to use.

Once you’ve mastered the basics of MT4, you’ll want to explore further the platform’s technical indicators and trading robots (known in the industry as Expert Advisors). 

Numerous traders prefer to use the company’s popular coding language (MetaQuotes Language) to develop their specialized tools and algorithms for trading. 

This has resulted in the development of a booming marketplace where you can purchase automated trading programs suited to specific techniques that will assist you in trading!

After you install MT4 on your computer desktop/laptop, you will be prompted to an initial display. See below:  

Menus and Toolbars

The first is the menu and toolbar section. In this section, you can see all the tools and features available at MT4.

Menu – File

On this menu, you can find commonly used tabs, such as:

• New Chart – to open a new chart by choosing the desired instrument.

• Profiles – to open the profile.

• Save as Picture – to submit the chart in the form of “BMP” or “GIF”.

• Open an account – to open a new account demo, log in to enter the account that you already have.

Menu – View

This menu contains the toolbars we need, such as a market watch, terminal, and change language. All the toolbars we choose will appear on the MT4 main layer, and several toolbars will appear below the menu.

Menu – Insert

This menu is to enter indicator-indicator and object-object needed on the chart section. We can use the indicators available. Even the book of ISA uses the indicator we have.

Menu – Charts

This menu is used to change the display on the chart, tailored to what we want, such as choosing a chart type, selecting a timeframe, zooming in, chart shift, and others.

Menu – Tools

This menu is used to access history libraries, do new orders, and open the Metaquotes Language Editor. We can also change the password, set the server, and others in the options section.

Menu – Window

Use this menu to set the main screen display, especially if you have several charts that are open simultaneously.

Menu – Help

This menu is the Help menu in general which contains all the things you need to know about MT4.

Market Watch

Market Watch is a part that displays prices from instruments available on the broker. You can access this display through the View menu or “Ctrl + M”.

Market Watch is a part of MT4 that contains information for you to trade, such as placing your first trade through MT4 and choosing from Forex, commodities, indices, CFD equities, and even crypto.

It also contains other features, such as opening a new position, the window chart, and looking for symbols.

Navigator

This part gives you quick access to various features of the terminal. This window can be opened/closed by pressing Ctrl + N by the “View – Navigator” menu OR by pressing the “Navigator” Window Button of the “Standard” Toolbar.

The list of features is accessible through a dropdown arrow and contains five groups: Accounts, Indicators, Expert Advisors, Custom Indicators, and Scripts.

Accounts

The “Accounts” group includes the list of Open Accounts. One can open a new demo account or delete the old one. 

Indicators

Indicators are primary tools for analyzing price movements, which include built-in indicators, community indicators purchased from the market, custom indicators, and more. 

Expert Advisor

This menu contains a list of all available expert advisors. Expert advisors in the terminal are programs that allow automating analytical and trading activities. 

Terminal

The terminal menu is a multifunctional window allowing access to various terminal features. This window allows control over trading activities, views news and account history, sets up alerts, and works with the internal mail and system journal.

The window can be opened by the “View – Terminals” menu by pressing Ctrl + T or the “Terminal” window button of the Standard Toolbar. 

Several tabs are found here:

Trade: Traders can view the status of open positions and pending orders as well as manage all trading activities here. The total financial result for all open positions is also published in this tab. 

Exposure: This tab contains the summary information about the state of assets by all open positions. 

Account History: This tab shows the history of all performed trade operations and balance without considering open positions. One can estimate the efficiency of all trade activities with the results given in the tab. 

Alerts: Various alerts can be viewed and set here. Any files executable in the operational environment (including wave files) and messages sent by email can be used as alerts. 

Signals: This tab displays trading signals of the “Signals” service, which are available for subscription.

CodeBase: Here, you can download any application published in the “CodeBase” section of the MQL5 community website.

Expert Advisors: Information about the functioning of the attached expert, including opening/closing of positions, order modifying, the expert’s messages, etc., are published in this tab.

Journal: Information about terminal launching and events during its operation, including all trade operations performed, is stored in the journal.

Chart Window

In this section, you can see the price movement in the form of a chart. You can add indicators, Expert Advisor, or object that you feel can help your trading journey.

Now that you know more about the MT4, you can start navigating your way and use these features when trading.

In this lesson, we will talk about leverage and how it affects your trading.

What is Leverage?

In simple words, leverage is a facility allowing traders to trade with less capital.

As we explained to you previously, 1 standard lot equals 100.000 units. If you buy 1 lot of USDCAD, you are purchasing 100.000 USD and exchanging this for CAD. Another example is that if you buy 1 lot EURUSD, you are buying 100.000 EUR and exchanging this for USD.

However, not everybody has 100.000USD to trade 1 lot. When leverage comes in, a facility from a brokerage provides a “loan” to retail traders so they can join in buying 1 lot with a smaller amount of capital.

Most brokerage firms provide various types of leverage. Some offer leverage of up to 1:500, which is 500 times your money to enter a position in Forex. If you have $1,000 in your account, you can trade up to 500,000 USD or 5 lots, depending on the currency pair.

Here’s an example:

You see a USDCAD pair going higher. You decided to buy 1 lot at the price of 1.2500 (1 USD = 1.2500CAD).

If you do a non-leveraged transaction, you will be buying 100.000 USD, which means now you own 100.000USD in your hand after you exchange from the amount of 125.000CAD.

After some movement from the USDCAD, you decide to close the position (selling back the 100.000USD to CAD), only this time, the USDCAD price has already gone up to 1.2600.

Your 100.000USD has a value of 126.000CAD, meaning you get a 1,000CAD difference.

Now let’s do the Leveraged transaction of 1:100.

You bought 1 lot of USDCAD at the price of 1.2500 and decided to sell at the price of 1.2600.

Because your account is leveraged this time, you get a “loan” from the brokerage to buy a 1 lot equal to 100.000USD. Therefore, you will only need an amount of 100.000USD divided by 100. 

This means you’ll only need 1,000USD to buy 1 lot.

So you own 1 LOT USDCAD, which equals 100.000USD in your account. Instead of using 100.000USD or 125.000CAD, you only need 1,000USD or 1,250CAD. When you decide to close the position, you will get the 1,000CAD as profits.

In comparison:

In a non-leveraged transaction, you get a profit of 1,000CAD using a 100,000USD or 125,000CAD, which is equal to 0.8% profits.

In a leveraged transaction, you get a profit of 1,000CAD using a 1,000USD or 1,250CAD, which equals 80% profits!

Now, let’s look at another example:

You want to buy 2 lots of EURUSD at the price of 1.1500 and close the position at the price of 1.1550, which is equal to 50 pips (explained in our previous lesson).

So, you buy 2 lots of EURUSD to “own” 200,000EUR at 1.1500 or equals 230,000USD.

How much will you need when using the leveraged account of 1:100?

You will need 200,000EUR divided by 100. That is a minimum of 2,000EUR at 1.1500 or 2,300USD.

Now, you are closing the position from 1.1500 to 1.1550 (a profit of 50 pips). You now “own” 200,000EUR at the price of 1.1550 or equals 231,000USD. Your profit is 1,000USD.

So, you only need 2,300USD to buy 2 lots of EURUSD at 1.1500 to get a profit of 1,000USD when you close the position at 1.1550, which equals 43,47%!

There is a huge potential to profit in the Forex market using less capital.

Nice, right? But you must remember this…

Based on the examples above, leverage amplifies the amount in your account when you are doing a transaction.

Leverage amplifies your profit potential. However, it also works the other way, increasing your risk potential!

Using the same EURUSD example above:

You want to buy 2 lots of EURUSD at the price of 1.1500 with the hope that the price will increase and profit from it. However, EURUSD falls to 1.1450.

How much are you losing?

So, you buy 2 lots of EURUSD to “own” 200,000EUR at 1.1500 or equals 230,000USD.

How much do you need when using the leveraged account of 1:100?

You will need 200,000EUR divided by 100, which means you are using 2,000EUR at the price of 1.1500 or equals to 2,300USD.

Now, the price is moving below your buying price to 1.1450, which means you are in a losing position of 50 pips. This means you “own” 200.000EUR at the price of 1.1450 or equals 229,000USD. Your loss is 1,000USD.

Since the price is moving against your position, you are experiencing a loss of 1,000USD or 43.47%.

Let’s see what happens if we only have a 10,000USD account in our leveraged trading account and experience a bigger loss. What will happen with the “loan” amount and the account?

Your starting balance is 10,000USD with leverage of 1:100.

You bought 2 lots of EURUSD at the price of 1,1500, which means you need 2,300USD from your balance to make the trade. Your balance is 7,700USD.

The price is going lower, which means you are experiencing a loss.

If the price goes down to 1.1450, you will lose a 1,000USD,

If the price goes down to 1.1400, you will lose a 2,000USD,

If the price goes down to 1.1350, you will lose a 3,000USD. The loss exceeded your capital for buying 2lots EURUSD in the first place. 

This is also eating your remaining balance. Now you have only 7,000USD left in your account.

If the price goes down to 1.1300, you will lose 4,000USD and be left with a 6,000USD account balance.

If the price goes down to 1.1250, you will lose 5,000USD and be left with a 5,000USD account balance.

What happens if the price reaches 1.1000 and you still haven’t closed the position?

You will lose 10,000USD.

Maybe you are thinking, “but I own a 200.000USD for 2 lots!”. 

Remember that it was a “loan” from the brokerage, and your real initial balance is 10,000USD. Therefore, if you lose 10,000USD, the market will eat all your initial balance. Based on the broker’s account rules, the brokerage has the right to close your position before it exceeds your balance.

Takeaway

Based on the above examples, it is a must to understand that leverage is a double-edged sword; on one side, you can get a high-profit potential transaction. On the other, your risk potential can get high. 

When you enter the forex market, you will come across a lot of jargon that might catch you off guard, including bulls and bears, hawks and doves, pips and ticks, and more. To understand the market, you must have a solid knowledge of regularly used market jargon.

Here are several terms you will encounter when foraying into the world of trading.

Long/Short

• Going long means you are “buying” when you expect a price to increase.

• Going short implies you are “selling” when you expect a price to decline.

Price Bid/Ask

• The Bid price is the price taken when placing a Sell position.

• The Ask price is the price taken when placing a Buy position.

Spread

The spread is the difference between the Bid and the Ask Prices. In forex, a lower spread is considered preferable. Generally, when a market is “liquid” (there are a large number of traders), spreads are lower.

Usually, Major currencies have a lower spread because it’s more popular. On the other hand, exotic currency pairs have a wider spread because there are fewer traders.

Bullish/Bearish

Market sentiment provides insight into the performance of an individual asset or the broader market. When the market sentiment is bullish, the price is increasing. When the market sentiment is bearish, the price is declining.

Hawkish/Dovish

Unlike Bullish and Bearish, Hawkish and Dovish refer to the central bank’s attitude toward the country’s monetary policy. When the central bank takes a Hawkish stance, such as allowing higher interest rates to achieve the central bank’s inflation target, the market sees this as something positive and generally causes prices to rise.

On the other hand, when the central bank takes a Dovish stance, such as keeping interest rates low to stimulate the economy, the market sees this as something negative and generally causes prices to fall.

Safe-Haven

As the name implies, a safe-haven means “safe assets”. Traders and investors seek them out to limit their exposure to or losses during a market slump. The US Dollar and the Japanese Yen are examples of safe-haven currencies. An instrument that is most often considered a safe-haven is Gold.

Hedging

Hedging is when you start a new trading position on the same currency pair in the opposite direction of an existing position. Traders frequently do this to hedge against or limit prospective losses.

Rollovers 

This is the procedure by which an open position’s settlement date is extended. If you want to hold a position overnight, rollover fees are determined at the end of each trading day.

Leverage

Leverage enables you to take on larger positions than would be achievable with your limited capital. For instance, if you wish to start a position on AUD/USD with $100 of your capital, 100:1 leverage allows you to open a position worth $10,000 ($100*100).

Naturally, traders must utilize this with caution. While leverage can dramatically boost earnings, it can also magnify losses.

Commissions

Commissions are the payments to a forex broker when you trade. Varying accounts frequently charge different commissions, so be sure to select the one that is most advantageous to you.

Now that you’ve deciphered the perplexing world of forex jargon, it’s time to learn more about the fundamentals of forex trading: when to buy and when to sell.

 In this lesson, we will cover the following:

• The two prices in the financial markets.
• What is the spread, and why it’s important?

Prices in the Forex Market

There are always two prices when you trade the forex market, the stock market, or any other financial market.

• Bid Price – The price that you use as your reference when you are going to enter a Sell position.
• Ask Price – The price that you use as your reference when you are going to enter a Buy position.

So, just like going to a money changer to exchange your money, you will see that they have both the Sell and Buy prices for a specific currency. 

Let me explain further using this chart:

This chart features the EURUSD, and you can see two prices: the Bid price on the left and the Ask price on the right.

If you want to open a Sell position, you can use the Bid Price as your reference. If you want to open a Buy position, you can use the Ask Price as your reference.

Let’s use that as a guide.

There is a Bid Price of 1.07962 and an Ask Price of 1.08008 for EURUSD.

When you click Sell, you need to focus on the Bid Price (1.07962) as your reference.

Let’s say the price goes down to Bid 1.07500 and Ask 1.07523. This means you are getting a profit. When you click close for this example, which means that you are “clicking” Buy to close the position, you must focus on the Ask Price as your reference.

The same concept applies when you plan to Buy EURUSD. When you click Buy, the price you must focus on is the Ask Price (1.08008).

If you want to close the position, click Sell to close the position and focus on the Bid Price as your reference.

Spread

Now that you know what Bid and Ask Prices are, it’s time you learn about the spread: the difference between the prices. 

From this example, you can see that the EURUSD has a spread of 4,6 pips.

The spread plays an important role in your trade because this will affect your result. Some brokerage firms may charge you a little, and some don’t charge any fees to trade. In this case, your transaction cost will be in the form of a spread.

Let’s explore further.

If the spread is your transaction cost, then a wider spread between the Bid and Ask price means the transaction cost is higher.

Example:

If you refer to this EURUSD spread, the transaction cost is 4,6 pips when buying or selling 1 standard lot of EURUSD. Because the pip value of EURUSD is 10USD per pip per lot, your transaction cost will be 46 USD.

Every time you enter a position in EURUSD, you must pay this transaction cost first before getting the profit from the price movement. Remember that the spread may change wider or tighter based on the market volume.

Note that your transaction cost to cover is higher if you have a wider spread. If your spread is tighter, your transaction cost to cover is lower.

What is a pip value, and how is it calculated?

To answer the question, you’ll need this information: the lot size you’re trading, the quote currency, and your account currency.

Allow me to explain.

The Lot Size

As you are probably aware, there are many lot sizes in the forex market, such as standard lot, mini lot, and so on.

1 standard lot is comparable to a hundred thousand units and is worth 10 dollars each pip.

1 mini lot equals 10.000 units and is valued at 1 dollar per pip, while

1 micro lot equals 1.000 units and is worth 10 cents per pip or 0.1 dollars per pip.

One thing to remember is that 10 mini lots equal 1 standard lot, as 10.000 units multiplied by ten equals 100.000 units.

And 10 micro lots equal to 1 mini lot, as 1.000 units multiplied by ten equals 10.000 units.

However, this calculation is only valid when the Quote Currency is in US Dollars.

Quote Currency

So, what is Quote Currency?

In direct and indirect currency pairs, the Quote Currency serves as the second currency and is utilized to value the Base Currency. For example, for GBPUSD, the base currency is the pound sterling (GBP), whereas the quote currency is the dollar (USD).

USDJPY The base currency is the USD, while the quote currency is the JPY.

GBPJPY The base currency is the GBP, while the quote currency is the JPY.

In that case, what if the quote currency isn’t the US dollar? If you’re trading a currency that isn’t the US dollar, then the calculation will follow the quote currency instead of the US dollar. When you’re trading, for example, the EURAUD, then the calculation will look like this:

1 standard lot is 10 Australian Dollars for 1 pip

1 mini lot is 1 Australian Dollar for 1 pip

1 micro lot is 0.1 Australian Dollars for 1 pip

The same calculation if we trade in GBPJPY,

1 standard lot is 10 Japanese Yen for 1 pip

1 mini lot is 1 Japanese Yen for 1 pip

1 micro lot is 0.1 Japanese Yen for 1 pip.

If we calculate using the lot size, we simply multiply it by the lot size we are using. For example, if we enter two standard lots in EURAUD, the pip value will be 20 AUD per 1 pip.

If we enter 2,7 standard lots in GBPJPY, we will receive a pip value of 27 JPY for 1 pip.

But then, how do you use this in real-life trades?

To put it into practice, you’ll need to calculate using the currency of your account.

Account Currency

When we open an account with a broker, we have to deposit our money in one type of currency for each account. You can open an account in USD, AUD, or another currency, depending on your brokerage. When you try to open an account with VT Markets, for example, you can only open an account with these currencies.

In this lesson, let’s try out the USD and CAD accounts.

Open a $1,000 USD account. The calculation will be simpler because most significant currency pairs, such as EURUSD, GBPUSD, and AUDUSD, use the USD as the Quote Currency.

The calculation for these pairs is as simple as adding the total value to your balance.

For example, if you earn 20 pips on a 1 standard lot of EURUSD, you earn a total profit of 20 pips multiplied by the 10USD pip value, for a total of 200USD. If you enter a 2 standard lot, you will receive 20 pips multiplied by ten dollars, then multiplied by 2 lots, resulting in a total of 400 dollars.

To add this profit to your balance, simply multiply your initial amount of 1,000 USD by 400 USD, resulting in a balance of 1,400 USD. This will be different the next time you open an account using CAD as the account currency.

Assume you have a 1,000CAD balance in your account. If we use the same profit as in the sample above, 400USD, then the profit cannot be added immediately to the CAD balance, simply because the currencies are different. To accomplish this, you must first convert the profit from USD to CAD. You must be aware of the exchange rate at the time of position closure.

Consider the following example: the exchange rate between USD and CAD is 1,25, which equals 1USD to 1,25CAD. Thus, 400USD multiplied by 1.25 equals 500CAD. Then you can add this to your balance: your initial balance of 1,000 CAD will be increased by 500 CAD (converted from 400USD), bringing your total to 1,500 CAD. It may appear hard, but there is no need to be concerned because all trading platforms nowadays provide an auto-calculating tool. This implies that your earnings will be calculated automatically using the currency associated with your account.

Pips and pipettes are terms commonly used by traders. Here’s what they mean.

What is a pip?

PIP stands for Percentage In Point. It is a way to measure how much a currency pair has changed in value.

We used to say a pip was the slightest change in the price of currency pairs, but then a new term came into use called a pipette.

To avoid confusion, Pip is the abbreviation for the fourth decimal place in a currency pair’s quote price (except the JPY pair).

Let’s have a look at an example.

Assuming the EURUSD goes from 1.1500 to 1.1520, how many pips are generated?

To figure how many pips the movement of EURUSD is, you only see the difference, which is 20 pips. As we said, the Pip is the fourth decimal place. In this example, the difference is 20 pips.

Consider another currency pair, GBPUSD, as an example. Consider another example in a different currency, the GBPUSD.

GBPUSD is trading at 1.3160, down from 1.3200. Thus, in this example, we may refer to GBPUSD as being down 40 pips. It is important to note that not all currency pairs have four decimal digits.

USDJPY

Because the currency pair versus the Japanese Yen (JPY) only has two decimal, we refer to the Pip as the second decimal place.

Consider the following example:

USDJPY is trading at 128.50 and has risen to 128.65, implying a 15 pip gain. GBPJPY’s move from 167.45 to 167.00 is a 45-pip loss. After we’ve figured out what PIP is, we’ll try to figure out what Pipette is.

What is a pipette?

After years of using only four decimal (two for the JPY Pair), the fifth decimal, Pipette, was introduced. Most brokers use the fifth decimal (except for JPY using three decimals); however, this Pipette is usually shown with a smaller number. Pipettes are most commonly referred to as fractional pips, or 1/10 the worth of a pip.

I know it sounds weird, but Pipette isn’t used very often in everyday language. However, consider the following example: EURUSD trades between 1.11505 and 1.11513. Thus, the EURUSD increased by eight pipettes, but because most traders were unconcerned about the change below one Pip, traders typically prefer to refer to it as 0.8 pips.

The following example is GPUSD decreasing from 1.32507 to 1.32403. Then, we can see that the GBPUSD decreased by 204 pipettes or 20.4 pips.

USDJPY with third decimals

Following that, let us consider an example with the JPY pair.

The GBPJPY increased from 167,503 to 167,758. Thus, GBPJPY increased by 255 pipettes or 25.5 pips. Easier to follow, right?

Therefore, bear this in mind. A pip is a unit of measurement of a currency pair’s value change; it is the fourth decimal place for most currency pairs except for the JPY, which is the second decimal place.

One Pipette, also known as fractional pips, is 1/10 of a pip, the fifth decimal point for most currency pairs but the third decimal point for JPY pairs.

The US Dollar is the most frequently traded currency in the world. As a result, most currencies are quoted against it. However, different types of currency pairs are used when referring to Forex trading, each of which is split into groups depending on the amount of trading activity and liquidity. These are known as majors, minors (or crosses), and exotic pairs.

Major currency pairs

The most traded currency pairs in the world are called the majors. They are generally the most liquid and attractive to all types of Forex traders. The EURUSD is the most traded pair, representing nearly 30% of all daily Forex trades on the entire Forex market.

Currencies not classed as major currencies but are normally traded against a major currency are called minor currencies and crosses.

Minor currency pairs and crosses

Currency pairs that do not contain the US Dollar are known as ‘crosses’. A currency pair involving a major non-US Dollar currency would also be known as a ‘minor currency pair’.

The most common crosses are pairs derived from the three major non-US Dollar currencies – Euro, Great British Pound, and Japanese Yen. For example, pairs that involve the euro are called ‘euro crosses’. Below is a list of Euro, Pound, Yen, and other crosses.

EURO CROSSES

GBP CROSSES

YEN CROSSES

OTHER CROSSES

Exotic currency pairs

Trading exotic pairs offer exposure to a wide range of developing and emerging market economies across Asia, the Middle East, and Africa. In general, exotic pairs are not traded as often as majors or crosses, which means they are not very liquid markets and lack consistent market activity.

There are often pros and cons associated with trading exotic currency pairs. Because they are not so widely traded, they can often be subject to higher trading fees; however, when the market moves, they can be subject to wild price fluctuations (suitable for the more experienced trader).

Below is a list of some of the main currency pairs referred to when talking about exotic pairs.

Nicknames

In Forex, many currency pairs (especially the majors) have particular nicknames which are commonly used in the market. Many even have an exciting story about why they were nicknamed that in the first place. For example, the FX pair GBPUSD is called ‘cable’.

This dates back to the 19th century when a communications cable ran across the Atlantic Ocean floor to get the exchange rate between the US Dollar and the British Pound.

In some cases, the currency by itself is known by a different name. For example, the US Dollar is often referred to as the ‘greenback’, while you may hear the British Pound referred to as ‘sterling’.

Below is a list of the most popular currency pair nicknames.

CURRENCY PAIR NICKNAME

Currency codes

Currencies are often abbreviated to a three-letter currency code. The first two letters symbolize the country’s name, while the third is the country’s currency.

Let’s look at a few examples.

GBP – ‘GB’ stands for Great Britain, while the ‘P’ stands for Pound

USD – ‘US’ stands for the United States, the ‘D’ stands for Dollar

JPY – ‘JP’ stands for Japan, the ‘Y’ stands for Yen

In trading, you will hear a lot about ‘pips’ and ‘spreads’. Learn about pips in Forex and how different factors can influence spreads.

(In comparison to other markets)

The forex market is the world’s largest, and it offers numerous advantages that attract traders. The following are some of the primary reasons to give forex trading a try.

Unparalleled liquidity

The foreign exchange market is highly liquid, which is another way of saying that other traders are always available to engage. However, why is liquidity so critical?

Assume you’re attempting to sell a Nokia phone manufactured in 2000. If you placed an ad on eBay asking for $1,000, you’re unlikely to receive an offer — and if you do, it’s likely to be for a few hundred dollars (at most) a month later. Essentially, there aren’t many buyers and vendors for that goods.

However, if you were to sell the current iPhone at the price you purchased, you would almost certainly receive multiple offers, most of which would be close to your asking price. This is simply due to the market’s high volume of buyers and sellers. This is a technique for proving enough liquidity.

Volatility

Another reason it is pretty popular is due to the volatility of the FX market. This is related to currency fluctuations, which are determined by the real economy of various countries. Because economic outlooks are constantly changing – due to factors such as recent news and events – the accompanying currency’s value will fluctuate. These movements provide traders with an opportunity to benefit from forex deals.

24-5

The currency market is open twenty-four hours a day, five days a week. This 24-hour trading provides traders in various world regions with numerous changes, depending on which markets are available at particular times. For instance, when trading sessions overlap – as they do during the few hours that the US and European markets are open concurrently – there can be more trading activity, resulting in new chances. The markets’ 24/5 nature also provides traders with flexibility – for example, even if you’re locked in the office all day, you may still conduct a few trades over lunch or while relaxing at home in the evening.

Trading with leverage

One of the beautiful aspects of forex is that it allows for leveraged trading. This indicates that you can use a small amount of capital to undertake a higher-value trade. In effect, leveraged trading will enable you to stretch your money further.

For instance, leverage of 1:100 means that a $1 investment may purchase $100 worth of “forex.” While leverage has the potential to help you earn more money more rapidly, it also has the potential to cause you to lose more money. Therefore, whenever you trade with leverage, proceed with prudence and trade only what you can afford to lose.

Forex – often spelled FX – is an abbreviation for “Foreign Exchange.” Fundamentally, it is similar to a stock exchange in that it is a market where one can exchange multiple currencies worldwide. According to a 2019 triennial report from the Bank for International Settlements (a global bank for national central banks), the daily trading volume for Forex reached $6.6 trillion in April 2019.

What Is the Forex Market?

The foreign exchange market is where currencies are traded. Currencies are important because they allow us to purchase goods and services locally and across borders. International currencies need to be exchanged to conduct foreign trade and business.

If you are living in the United States and want to buy cheese from France, then you or the company from which you buy the cheese must pay the French for the cheese in euros (EUR). The US importer would have to exchange the equivalent value of US dollars (USD) for euros.

You’re travelling from Australia to the United States in our scenario. You have AUD 1,000 to spend on your trip and thus visit a currency exchange to convert your Australian dollars to US dollars.

Assume the exchange rate was 1 AUD to 0.7 USD. This means that for each AUD you hand over to the currency broker, you will receive 0.7 USD in exchange. Given that you have 1,000 Australian dollars, you would obtain US$700 in this exchange.

Unfortunately, some things came up before your scheduled flight to New York, and you couldn’t go. As a result, you cancel your vacation and return to the currency dealer to exchange your US$700 for Australian dollars. To your amazement, the dealer hands you AUD 1,100 – a sum greater than the AU$1000 you had paid.

Consider the possibility that the currency broker made an error. Let us re-examine.

In this case, you made a profit of AUD 100. You originally spent AUD 1,000 to purchase US$700, but now you’re paying the same US$700 and receiving AUD 1,100 in return. That is a brief overview of Forex trading; it is not only about exchanging one currency for another but also about attempting to benefit from it.

In this instance, we profited since the US Dollar rose against the Australian Dollar while we held it. This enabled us to convert our original US$700 for more Australian Dollars than we had previously.

One unique aspect of this international market is that there is no central marketplace for foreign exchange. Instead, currency trading is conducted electronically over the counter (OTC), meaning that all transactions occur via computer networks among traders worldwide rather than on one centralized exchange.

The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centres of Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo, and Zurich—across almost every time zone.

This means that the forex market begins anew when the US trading day ends in Tokyo and Hong Kong. The forex market can be highly active anytime, with price quotes changing constantly.

A Brief History of Forex

In its most basic sense, the forex market has been around for centuries. People have always exchanged or bartered goods and currencies to purchase goods and services. However, as we understand it today, the forex market is a relatively modern invention.

After the Bretton Woods accord began to collapse in 1971, more currencies were allowed to float freely against one another. The values of individual currencies vary based on demand and circulation and are monitored by foreign exchange trading services.

Commercial and investment banks conduct most of the trading in forex markets on behalf of their clients. Still, there are also speculative opportunities for trading one currency against another for professional and individual investors.

There are two distinct features of currencies as an asset class:

• You can earn the interest rate differential between two currencies.
• You can profit from changes in the exchange rate.

An investor can profit from the difference between two interest rates in two different economies by buying the currency with the higher interest rate and shorting the currency with the lower interest rate. Before the 2008 financial crisis, shorting the Japanese yen (JPY) and buying British pounds (GBP) was expected because the interest rate differential was huge. This strategy is sometimes referred to as a carry trade.