Forex Basics

Why Forex?

Forex is a commonly used abbreviation for "foreign exchange". It typically describes the buying and selling of currency in the foreign exchange market, especially by investors and speculators. The familiar expression, "buy low and sell high," certainly applies to currency trading. A forex trader purchases currencies that are undervalued and sells currencies that are overvalued; just as a stock trader purchases stock that is undervalued and sells stock that is overvalued.

What Is Traded In Forex?

In forex trading, when you buy, say, the Japanese yen, you are basically buying a "share" in the Japanese economy. You are betting that the Japanese economy is doing well, and will even get better as time goes. Once you sell those "shares" back to the market, hopefully, you will end up with a profit.


Think of buying a currency as buying a share in a particular country, like buying stocks of a company. The price of the currency is usually a direct reflection of the market’s opinion on the current and future health of its respective economy.


In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country’s economy, compared to other countries’ economies.


Currency symbols always have three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country’s currency.

Buying And Selling In Currency Pairs

Forex trading is the simultaneous buying of one currency and selling another. Currencies are traded through a broker or dealer, and are traded in pairs; for example the euro and the U.S. dollar (EUR/USD) or the British pound and the Japanese yen (GBP/JPY). Each currency pairs constantly in a "tug of war" with each currency on its own side of the rope. Exchange rates fluctuate based on which currency is stronger at the moment.

Major Currency Pairs
Currency Pair
Countries
FX Geek Speak
EUR/USD
Euro zone / United States
"euro dollar"
USD/JPY
United States / Japan
"dollar yen"
GBP/USD
United Kingdom / United States
pound dollar"
USD/CHF
United States/ Switzerland
"dollar swissy"
USD/CAD
United States / Canada
"dollar loonie"
AUD/USD
Australia / United States
"dollar loonie"
NZD/USD
New Zealand / United States
"kiwi dollar"
Major Cross-Currency Pairs or Minor Currency Pairs

Currency pairs that don’t contain the U.S. dollar (USD) are known as cross-currency pairs or simply as the "crosses." Major crosses are also known as "minors." The most actively traded crosses are derived from the three major non-USD currencies: EUR, JPY, and GBP.

EURO (Euro Zone)
YEN (Japan)
GBP (United Kingdom)
Currency Pair
FX Geek Speak
Currency Pair
FX Geek Speak
Currency Pair
FX Geek Speak
EUR/CHF
"euro swissy
EUR/JPY
"euro yen"
GBP/CHF
"pound swissy"
EUR/GBP
"euro pound"
GBP/JPY
"pound yen"
GBP/AUD
"pound aussie"
EUR/CAD
"euro loonie"
CHF/JPY
"swissy yen"
GBP/CAD
"pound loonie"
EUR/AUD
"euro aussie"
CAD/JPY
"loonie yen"
GBP/NZD
"pound kiwi"
EUR/NZD
"euro kiwi"
AUD/JPY
"aussie yen"
NZD/JPY
"kiwi yen"
Other Crosses
Pair
FX Geek Speak
AUD/CHF
"aussie swissy"
AUD/CAD
"aussie loonie"
AUD/NZD
"aussie kiwi"
CAD/CHF
"loonie swissy"
NZD/CHF
"kiwi swissy"
NZD/CAD
"kiwi loonie"
Exotic Currency Pairs

Exotic currency pairs are made up of one major currency paired with the currency of an emerging economy, such as Brazil, Mexico, or Hungary. Depending on your forex broker, you may see the following exotic currency pairs so it’s good to know what they are. Keep in mind that these pairs aren’t as heavily traded as the "majors" or "crosses," so the transaction costs associated with trading these pairs are usually bigger.

Currency Pair
Countries
FX Geek Speak
USD/HKD
United States / Hong Kong
USD/SGD
United States / Singapore
USD/ZAR
United States / South Africa
"dollar rand"
USD/THB
United States / Thailand
"dollar baht"
USD/MXN
United States / Mexico
"dollar peso"
USD/DKK
United States / Denmark
"dollar krone"
USD/SEK
United States / Sweden
USD/NOK
United States / Sweden

It isn’t unusual to see spreads that are two or three times bigger than that of EUR/USD or USD/JPY. So if you want to trade exotics currency pairs, remember to factor this in your decision.

Market Size And Liquidity

Unlike other financial markets like the New York Stock Exchange, the forex market has neither a physical location nor a central exchange. The forex market is considered an Over-the-Counter (OTC), or "Interbank" market due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period. This means that the spot forex market is spread all over the globe with no central location. They can take place anywhere.

The forex OTC market is by far the biggest and most popular financial market in the world, traded globally by a large number of individuals and organizations. In the OTC market, participants determine who they want to trade with depending on trading conditions, attractiveness of prices, and reputation of the trading counterpart.

The chart below shows the ten most actively traded currencies.

*Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals 200% instead of 100%

The dollar is the most traded currency, taking up 84.9% of all transactions. The euro’s share is second at 39.1%, while that of the yen is third at 19.0%. As you can see, most of the major currencies are hogging the top spots on this list!

The chart above shows just how often the U.S. dollar is traded in the forex market. It is on one side of a ridiculous 84.9% of all reported transactions. The Dollar is King in the Forex Market, You’ve probably noticed how often we keep mentioning the U.S. dollar (USD). If the USD is one half of every major currency pair, and the majors comprise 75% of all trades, then it’s a must to pay attention to the U.S. dollar. The USD is king!

In fact, according to the International Monetary Fund (IMF), the U.S. dollar comprises roughly 62% of the world’s official foreign exchange reserves! Because almost every investor, business, and central bank own it, they pay attention to the U.S. dollar.

There are also other significant reasons why the U.S. dollar plays a central role in the forex market:

  • The United States economy is the LARGEST economy in the world.
  • The U.S. dollar is the reserve currency of the world.
  • The United States has the largest and most liquid financial markets in the world.
  • The United States has a super stable political system.
  • The United States is the world’s sole military superpower.

The U.S. dollar is the medium of exchange for many cross-border transactions. For example, oil is priced in U.S. dollars. So if Mexico wants to buy oil from Saudi Arabia, it can only be bought with U.S. dollar. If Mexico doesn’t have any dollars, it has to sell its pesos first and buy U.S. dollars.

Speculation in the Forex Market, one important thing to note about the forex market is that while commercial and financial transactions are part of trading volume, most currency trading is based on speculation.

In other words, most trading volume comes from traders that buy and sell based on intraday price movements. The trading volume brought about by speculators is estimated to be more than 90%! The scale of the forex market means that liquidity – the amount of buying and selling volume happening at any given time – is extremely high.

This makes it very easy for anyone to buy and sell currencies. From the perspective of an investor, liquidity is very important because it determines how easily price can change over a given time period. A liquid market environment like forex enables huge trading volumes to happen with very little effect on price, or price action.

While the forex market is relatively very liquid, the market depth could change depending on the currency pair and time of day. In our forex trading sessions part of the school, we’ll tell you how the time of your trades can affect the pair you’re trading.

Different Ways To Trade Forex

Because forex is so awesome, traders came up with a number of different ways to invest or speculate in currencies. Among these, the most popular ones are forex spot, futures, options, and exchange-traded funds (or ETFs).

Spot Market

In the spot market, currencies are traded immediately or "on the spot," using the current market price. What’s awesome about this market is its simplicity, liquidity, tight spreads, and round-the-clock operations. It’s very easy to participate in this market since accounts can be opened with as little as a $25! (Not that we suggest you do). Aside from that, most brokers usually provide charts, news, and research for free.

Futures

Futures are contracts to buy or sell a certain asset at a specified price on a future date (That’s why they’re called futures!). Forex futures were created by the Chicago Mercantile Exchange (CME) way back in 1972, when bell bottoms and platform boots were still in style. Since futures contracts are standardized and traded through a centralized exchange, the market is very transparent and well-regulated. This means that price and transaction information are readily available.

Options

An "option" is a financial instrument that gives the buyer the right or the option, but not the obligation, to buy or sell an asset at a specified price on the option’s expiration date. If a trader "sold" an option, then he or she would be obliged to buy or sell an asset at a specific price at the expiration date. Just like futures, options are also traded on an exchange, such as the Chicago Board Options Exchange, the International Securities Exchange, or the Philadelphia Stock Exchange.

However, the disadvantage in trading forex options is that market hours are limited for certain options and the liquidity is not nearly as great as the futures or spot market.

Exchange-traded Funds

Exchange-traded funds or ETFs are the youngest members of the forex world. An ETF could contain a set of stocks combined with some currencies, allowing the trader to diversify with different assets. These are created by financial institutions and can be traded like stocks through an exchange. Like forex options, the limitation in trading ETFs is that the market isn’t open 24 hours. Also, since ETFs contain stocks, these are subject to trading commissions and other transaction costs.

Advantages of Forex Trading
  • No commissions : No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail brokers are compensated for their services through something called the "bid-ask spread".
  • No middlemen : Spot currency trading eliminates the middlemen and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
  • No fixed lot size : In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5,000 ounces. In spot forex, you determine your own lot, or position size. This allows traders to participate with accounts as small as $25 (although we’ll explain later why a $25 account is a bad idea).
  • Low transaction costs : The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions. At larger dealers, the spread could be as low as 0.07%. Of course this depends on your leverage and all will be explained later.
  • A 24-hour market : There is no waiting for the opening bell. From the Monday morning opening in Australia to the afternoon close in New York, the forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.
  • No one can corner the market : The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank or the mighty Chuck Norris himself) can control the market price for an extended period of time.
  • Leverage : all trades are executed using borrowed money. This allows you to take advantage of leverage. Leverage of 400:1 allows you to trade with $1,000 in the market by setting aside only $2.50 as a security deposit. This means that you can take advantage of even the smallest movements in currencies by controlling more money in the market than you have in your account. On the other hand, leverage can significantly increase your losses. Trading foreign exchange with any level of leverage may not be suitable for all investors.
  • High Liquidity : Because the forex market is so enormous, it is also extremely liquid. This is an advantage because it means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will as there will usually be someone in the market willing to take the other side of your trade. You are never "stuck" in a trade. You can even set your online trading platform to automatically close your position once your desired profit level (a limit order) has been reached, and/or close a trade if a trade is going against you (a stop loss order).
  • Low Barriers to Entry : You would think that getting started as a currency trader would cost a ton of money. The fact is, when compared to trading stocks, options or futures, it doesn’t. Online forex brokers offer "mini" and "micro" trading accounts, some with a minimum account deposit of $25.
  • Free Stuff Everywhere : Most online forex brokers offer "demo" accounts to practice trading and build your skills, along with real-time forex news and charting services. Demo accounts are very valuable resources for those who are "financially hampered" and would like to hone their trading skills with "play money" before opening a live trading account and risking real money.
Forex vs. Stocks
  • 24-Hour Market : The forex market is a seamless 24-hour market. Most brokers are open from Sunday at 4:00 pm EST until Friday at 4:00 pm EST, with customer service usually available 24/7. With the ability to trade during the U.S., Asian, and European market hours, you can customize your own trading schedule.
  • Minimal or No Commissions : Most forex brokers charge no commission or additional transactions fees to trade currencies online or over the phone. Combined with the tight, consistent, and fully transparent spread, forex trading costs are lower than those of any other market. Most brokers are compensated for their services through the bid/ask spread.
  • Instant Execution of Market Orders : Your trades are instantly executed under normal market conditions. Under these conditions, usually the price shown when you execute your market order is the price you get. You’re able to execute directly off real-time streaming prices.
  • Short-Selling without an Uptick : Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or whichever way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. So you always have equal access to trade in a rising or falling market.
  • No Middlemen : Centralized exchanges provide many advantages to the trader. However, one of the problems with any centralized exchange is the involvement of middlemen. Any party located in between the trader and the buyer or seller of the security or instrument traded will cost them money. The cost can be either in time or in fees. Spot currency trading, on the other hand, is decentralized, which means quotes can vary from different currency dealers. Competition between them is so fierce that you are almost always assured that you get the best deals. Forex traders get quicker access and cheaper costs.
  • Buy/Sell programs do not control the market : How many times have you heard that "Fund A" was selling "X" or buying "Z"? The stock market is very susceptible to large fund buying and selling. In spot trading, the massive size of the forex market makes the likelihood of any one fund or bank controlling a particular currency very small. Banks, hedge funds, governments, retail currency conversion houses, and large net worth individuals are just some of the participants in the spot currency markets where the liquidity is unprecedented.
  • Analysts and brokerage firms are less likely to influence the market : If Heard about a certain Internet stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as "buy," in TV, when the stock was rapidly declining? It is the nature of these relationships. No matter what the government does to step in and discourage this type of activity, we have not heard the last of it. IPOs are big business for both the companies going public and the brokerage houses. Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear.
Advantages
Forex
Stocks
24-Hour Trading
YES
NO
Minimal or no Commission
YES
NO
Instant Execution of Market Orders
YES
NO
Short-selling without an Uptick
YES
NO
No Middlemen
YES
NO
No Market Manipulation
YES
NO
Forex vs. Futures

The forex market also boasts of a bunch of advantages over the futures market, similar to its advantages over stocks. But wait, there’s more… So much more!

  • Liquidity : In the forex market, $5.3 trillion is traded daily, making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. The futures market trades a puny $30 billion per day. Thirty billion? Peanuts!
    The futures markets can’t compete with its relatively limited liquidity. The forex market is always liquid, meaning positions can be liquidated and stop orders executed with little or no slippage except in extremely volatile market conditions.
  • 24-Hour Market : At 5:00 pm EST Sunday, trading begins as markets open in Sydney. At 7:00 pm EST the Tokyo market opens, followed by London at 3:00 am EST. And finally, New York opens at 8:00 am EST and closes at 4:00 p.m. EST. Before New York trading closes, the Sydney market is back open – it’s a 24-hour seamless market!
    As a trader, this allows you to react to favorable or unfavorable news by trading immediately. If important data comes in from the United Kingdom or Japan while the U.S. futures market is closed, the next day’s opening could be a wild ride. (Overnight markets in futures currency contracts exist, but they are thinly traded, not very liquid, and are difficult for the average investor to access.)
  • Minimal or no commissions :With Electronic Communications Brokers becoming more popular and prevalent over the past couple of years, there is the chance that a broker may require you to pay commissions. But really, the commission fees are peanuts compared to what you pay in the futures market. The competition among brokers is so fierce that you will most likely get the best quotes and very low transaction costs.
  • Price Certainty : When trading forex, you get rapid execution and price certainty under normal market conditions. In contrast, the futures and equities markets do not offer price certainty or instant trade execution. Even with the advent of electronic trading and limited guarantees of execution speed, the prices for fills for futures and equities on market orders are far from certain. The prices quoted by brokers often represent the LAST trade, not necessarily the price for which the contract will be filled.
  • Guaranteed Limited Risk : Traders must have position limits for the purpose of risk management. This number is set relative to the money in a trader’s account. Risk is minimized in the spot forex market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the available trading capital in your account.
    During normal market conditions, all open positions will be closed immediately (during fast market conditions, your position could be closed beyond your stop loss level).
    In the futures market, your position may be liquidated at a loss bigger than what you had in your account, and you will be liable for any resulting deficit in the account. That sucks.
Advantages
Forex
Futures
24-Hour Trading
YES
NO
Minimal or no Commission
YES
NO
Up to 500:1 Leverage
YES
NO
Price Certainty
YES
NO
Guaranteed Limited Risk
YES
NO
Forex Market Structure

The most of retail traders understanding the structure of the Forex market is something that is often overlooked. This is a critical element that needs to be considered when designing and implementing any trading plan. The forex market differs from other global markets due to the way it is structured. The main factors affecting the structure of the Forex market are the ways Forex products are traded, the participants and their motivation, regulation and the sheer size of the market. Since transactions in the Forex market are done over-the-counter (OTC) and not through a central exchange like futures or shares, prices behave differently. Understanding these differences is essential to your development as a forex trader and will only serve to help you in the future.

market

By its very nature, the stock market tends to be very monopolistic. There is only one entity, one specialist that controls prices. All trades must go through this specialist. Because of this, prices can easily be altered to benefit the specialist, and not traders.

In the stock market, the specialist is forced to fulfill the order of its clients. Now, let’s say the number of sellers suddenly exceed the number of buyers. The specialist, which is forced to fulfill the order of its clients, the sellers in this case, is left with a bunch of stock that he cannot sell-off to the buyer side.

In order to prevent this from happening, the specialist will simply widen the spread or increase the transaction cost to prevent sellers from entering the market. In other words, the specialists can manipulate the quotes it is offering to accommodate its needs.

market
The FX Ladder

Even though the forex market is decentralized, it isn’t pure and utter chaos! The participants in the FX market can be organized into a ladder. To better understand what we mean, here is a neat illustration:

hierarchy

At the very top of the forex market ladder is the interbank market. Composed of the largest banks of the world and some smaller banks, the participants of this market trade directly with each other or electronically through the Electronic Brokering Services (EBS) or the Reuters Dealing 3000-Spot Matching.

The competition between the two companies – the EBS and the Reuters Dealing 3000-Spot Matching – is similar to Coke and Pepsi. They are in constant battle for clients and continually try to one-up each other for market share. While both companies offer most currency pairs, some currency pairs are more liquid on one than the other.

For the EBS plaform, EUR/USD, USD/JPY, EUR/JPY, EUR/CHF, and USD/CHF are more liquid. Meanwhile, for the Reuters platform, GBP/USD, EUR/GBP, USD/CAD, AUD/USD, and NZD/USD are more liquid.

All the banks that are part of the interbank market can see the rates that each other is offering, but this doesn’t necessarily mean that anyone can make deals at those prices. Like in real life, the rates will be largely dependent on the established CREDIT relationship between the trading parties. Just to name a few, there’s the "B.F.F. rate," the "customer rate," and the "ex-wife-you-took-everything rate." It’s like asking for a loan at your local bank. The better your credit standing and reputation with them, the better the interest rates and the larger loan you can avail.

Next on the ladder are the hedge funds, corporations, retail market makers, and retail ECNs. Since these institutions do not have tight credit relationships with the participants of the interbank market, they have to do their transactions via commercial banks. This means that their rates are slightly higher and more expensive than those who are part of the interbank market.

At the very bottom of the ladder are the retail traders. It used to be very hard for us little people to engage in the forex market but, thanks to the advent of the internet, electronic trading, and retail brokers, the difficult barriers to entry in forex trading have all been taken down. This gave us the chance to play with those high up the ladder and poke them with a very long and cheap stick.

Forex Market Players

It is essential for you that you understand the nature of the spot forex market and who are the main forex market players. Until the late 1990s, only the "big guys" could play this game. The initial requirement was that you could trade only if you had about ten to fifty million bucks to start with! Forex was originally intended to be used by bankers and large institutions, and not by us "little guys." However, because of the rise of the internet, online forex brokers are now able to offer trading accounts to "retail" traders like us. The following are the major forex market players:

1. The Super Banks

Since the forex spot market is decentralized, it is the largest banks in the world that determine the exchange rates. Based on the supply and demand for currencies, they are generally the ones that make the bid/ask spread that we all love (or hate, for that matter). These large banks, collectively known as the interbank market, take on a ridonkulous amount of forex transactions each day for both their customers and themselves. A couple of these super banks include UBS, Barclays Capital, Deutsche Bank, and Citigroup. You could say that the interbank market is THE foreign exchange market.

2. Large Commercial Companies

Companies take part in the foreign exchange market for the purpose of doing business. For instance, Apple must first exchange its U.S. dollars for the Japanese yen when purchasing electronic parts from Japan for their products. Since the volume they trade is much smaller than those in the interbank market, this type of market player typically deals with commercial banks for their transactions.

Mergers and acquisitions (M&A) between large companies can also create currency exchange rate fluctuations. In international cross-border M&As, a lot of currency conversations happens that could move prices around.

3. Governments and Central Banks

Governments and central banks, such as the European Central Bank, the Bank of England, and the Federal Reserve, are regularly involved in the forex market too. Just like companies, national governments participate in the forex market for their operations, international trade payments, and handling their foreign exchange reserves.

Meanwhile, central banks affect the forex market when they adjust interest rates to control inflation. By doing this, they can affect currency valuation. There are also instances when central banks intervene, either directly or verbally, in the forex market when they want to realign exchange rates. Sometimes, central banks think that their currency is priced too high or too low, so they start massive sell/buy operations to alter exchange rates.

4. The Speculators

This is probably the mantra of the speculators. Comprising close to 90% of all trading volume, speculators as forex market players come in all shapes and sizes. Some have fat pockets, some roll thin, but all of them engage in the forex simply to make bucket loads of cash.

Retail Forex Brokers

In the past, only the big speculators and highly capitalized investment funds could trade currencies, but thanks to retail forex brokers and the Internet, this isn’t the case anymore.

With hardly any barriers to entry, anybody could just contact a broker, open up an account, deposit some money, and trade forex from the comfort of their own home. Brokers basically come in two forms:

1. Market makers, as their name suggests, "make" or set their own bid and ask prices themselves and

2. Electronic Communications Networks (ECN), who use the best bid and ask prices available to them from different institutions on the interbank market.

Market Makers

Let’s say you wanted to go to France to eat some snails. In order for you to transact in the country, you need to get your hands on some euros first by going to a bank or the local foreign currency exchange office. For them to take the opposite side of your transaction, you have to agree to exchange your home currency for euros at the price they set.

Like in all business transactions, there is a catch. In this case, it comes in the form of the bid/ask spread.

For instance, if the bank’s buying price (bid) for EUR/USD is 1.2000, and their selling price (ask) is 1.2002, then the bid/ask spread is 0.0002. Although seemingly small, when you’re talking about millions of these forex transactions every day, it does add up to create a hefty profit for the market makers!

You could say that market makers are the fundamental building blocks of the foreign exchange market. Retail market makers basically provide liquidity by "repackaging" large contract sizes from wholesalers into bite size pieces. Without them, it will be very hard for the average Joe to trade forex.

Electronic Communications Network

Electronic Communication Network is the name given for trading platforms that automatically match customer’s buy and sell orders at stated prices. These stated prices are gathered from different market makers, banks, and even other traders who use the ECN. Whenever a certain sell or buy order is made, it is matched up to the best bid/ask price out there.

Due to the ability of traders to set their own prices, ECN brokers typically charge a VERY small commission for the trades you take. The combination of tight spreads and small commission usually make transaction costs cheaper on ECN brokers.

Forex Trading Sessions

The forex market is open 24 hours a day, but that doesn’t mean it’s always active the whole day. You can make money trading when the market moves up, and you can even make money when the market moves down but you will have a very difficult time trying to make money when the market doesn’t move at all and believe us, there will be times when the market is as still as the victims of Medusa. This lesson will help determine when the best times of the day are to trade.

Forex Market Hours

The forex market can be broken up into four major trading sessions: the Sydney session, the Tokyo session, the London session, and Pipcrawler’s favorite time to trade, the New York session. Below are tables of the open and close times for each session:

Time ZoneTime Zone Summer (approx. April – October) Winter (approx. October – April)
EDT GMT EST GMT
Sydney Open
Sydney Close
6:00 PM
3:00 AM
10:00 PM
7:00 AM
4:00 PM
1:00 AM
9:00 PM
6:00 AM
Tokyo Open
Tokyo Close
7:00 PM
4:00 AM
11:00 PM
8:00 AM
6:00 PM
3:00 AM
11:00 PM
8:00 AM
London Open
London Close
3:00 AM
12:00 PM
7:00 AM
4:00 PM
3:00 AM
12:00 PM
8:00 AM
5:00 PM
New York Open
New York Close
8:00 AM
5:00 PM
12:00 PM
9:00 PM
8:00 AM
5:00 PM
1:00 PM
10:00 PM

Actual open and close times are based on local business hours. This varies during the months of October and April as some countries shift to/from daylight savings time (DST). The day within each month that a country may shift to/from DST also varies.

You can see that in between each forex trading session, there is a period of time where two sessions are open at the same time. During the summer, from 3:00-4:00 am EDT, the Tokyo session and London session overlap, and during both summer and winter from 8:00 am-12:00 pm ET, the London session and the New York session overlap.

Naturally, these are the busiest times during the trading day because there is more volume when two markets are open at the same time. This makes sense because during those times, all the market participants are wheelin’ and dealin’, which means that more money is transferring hands.

Now, you’re probably looking at the Sydney open and thinking why it shifts two hours. You’d think that Sydney’s open would only move one hour when the U.S. adjusts for standard time, but remember that when the U.S. shifts one hour back, Sydney actually moves forward by one hour (seasons are opposite in Australia). You should always remember this if you ever plan to trade during that time period. Let’s take a look at the average pip movement of the major currency pairs during each forex trading session.

Pair Tokyo London New York
EUR/USD
76
114
92
GBP/USD
92
127
99
USD/JPY
51
66
59
AUD/USD
77
83
81
NZD/USD
62
72
70
USD/CAD
57
96
96
USD/CHF
67
102
83
EUR/JPY
102
129
107
GBP/JPY
118
151
132
AUD/JPY
98
107
103
EUR/GBP
78
61
47
EUR/CHF
79
109
84

From the table, you will see that the European session normally provides the most movement.

Tokyo Session

The opening of the Tokyo session at 12:00 AM GMT marks the start of the Asian session. You should take note that the Tokyo session is sometimes referred to as the

Asian session because Tokyo is the financial capital of Asia.

One thing worth noting is that Japan is the third largest forex trading center in the world. This shouldn’t be too surprising since the yen is the third most traded currency, partaking in 16.50% of all forex transactions. Overall, about 21% of all forex transactions take place during this session. Below is a table of the Asian session pip ranges of the major currency pairs.

Pair Tokyo Pair Tokyo
EUR/USD
56
USD/CHF
40
GBP/USD
54
EUR/JPY
57
USD/JPY
30
GBP/JPY
72
AUD/USD
65
AUD/JPY
65
NZD/USD
58
EUR/GBP
23
USD/CAD
39
EUR/CHF
-

These pip values were calculated using averages of past data from the month of May 2012. Take note that these are NOT ABSOLUTE VALUES and can vary depending on liquidity and other market conditions. Also, the session range for EUR/CHF has not been included since the Swiss franc has been pegged to the euro at 1.2000 during the period.

Here some key characteristics that you should know about the Tokyo session:

  • Action isn’t only limited to Japanese shores. Tons of forex transactions are made in other financial hot spots like Hong Kong, Singapore, and Sydney.
  • The main market participants during the Tokyo session are commercial companies (exporters) and central banks. Remember, Japan’s economy is heavily export dependent and, with China also being a major trade player, there are a lot of transactions taking place on a daily basis.
  • Liquidity can sometimes be very thin. There will be times when trading during this period will be like fishing – you might have to wait a long, long time before getting a nibble.
  • It is more likely that you will see stronger moves in Asia Pacific currency pairs like AUD/USD and NZD/USD as opposed to non-Asia Pacific pairs like GBP/USD.
  • During those times of thin liquidity, most pairs may stick within a range. This provides opportunities for short day trades or potential breakout trades later in the day. Most of the action takes place early in the session, when more economic data is released.
  • Moves in the Tokyo session could set the tone for the rest of the day. Traders in latter sessions will look at what happened during the Tokyo session to help organize and evaluate what strategies to take in other sessions. Typically, after big moves in the preceding New York session, you may see consolidation during the Tokyo session.
Which Pairs Should You Trade?

Since the Tokyo session is when news from Australia, New Zealand, and Japan comes out, this presents a good opportunity to trade news events. Also, there could be more movement in yen pairs as a lot of yen is changing hands as Japanese companies are conducting business.

Take note that China is also an economic superpower, so whenever news comes out from China, it tends to create volatile moves. With Australia and Japan relying heavily on Chinese demand, we could see greater movement in AUD and JPY pairs when Chinese data comes in.

London Session

Just when Asian market participants are starting to close shop, their European counterparts are just beginning their day.

While there are several financial centers all around Europe, it is London that market participants keep their eyes on.

Historically, London has always been at a center of trade, thanks to its strategic location. It’s no wonder that it is considered the forex capital of the world with thousands of businessmen making transactions every single minute. About 30% of all forex transactions happen during the London session.

Below is a table of the London session pip ranges of the major currency pairs.

Pair London Pair London
EUR/USD
83
USD/CHF
58
GBP/USD
82
EUR/JPY
80
USD/JPY
36
GBP/JPY
102
AUD/USD
60
AUD/JPY
86
NZD/USD
64
EUR/GBP
40
USD/CAD
66
EUR/CHF
-

These pip values were calculated using averages of past data from the month of May 2012. Take note that these are NOT ABSOLUTE VALUES and can vary depending on liquidity and other market conditions. Also, the session range for EUR/CHF has not been included since the Swiss franc has been pegged to the euro at 1.2000 during the period.

Here are some neat facts about European session:

  • Because the London session crosses with the two other major trading sessions–and with London being such a key financial center–a large chunk of forex transactions take place during this time. This leads to high liquidity and potentially lower transaction costs, i.e., lower pip spreads.
  • Due to the large amount of transactions that take place, the London trading session is normally the most volatile session.
  • Most trends begin during the London session, and they typically will continue until the beginning of the New York session.
  • Volatility tends to die down in the middle of the session, as traders often go off to eat lunch before waiting for the New York trading period to begin.
  • Trends can sometimes reverse at the end of the London session, as European traders may decide to lock in profits.
Which Pairs Should You Trade?

Because of the volume of transactions that take place, there is so much liquidity during the European session that almost any pair can be traded.

Of course, it may be best to stick with the majors (EUR/USD, GBP/USD, USD/JPY, and USD/CHF), as these normally have the tightest spreads.

Also, it is these pairs that are normally directly influenced by any news reports that come out during the European session.

You can also try the yen crosses (more specifically, EUR/JPY and GBP/JPY), as these tend to be pretty volatile at this time. Because these are cross pairs, the spreads might be a little wider though.

Next up, we have the New York session, a jungle where dreams are made of. Hey, isn’t that an Alicia Keys song?

New York Session

Right as European traders are getting back from their lunch breaks, the U.S. session begins at 8:00 am EST as traders start rolling into the office. Just like Asia and Europe, the U.S. session has one major financial center that the markets keep their eyes on. Below is a table of the New York session pip ranges of the major currency pairs.

Pair New York Pair New York
EUR/USD
77
USD/CHF
56
GBP/USD
68
EUR/JPY
72
USD/JPY
34
GBP/JPY
77
AUD/USD
68
AUD/JPY
71
NZD/USD
62
EUR/GBP
36
USD/CAD
67
EUR/CHF
-

These pip values were calculated using averages of past data from the month of May 2012. Take note that these are NOT ABSOLUTE VALUES and can vary depending on liquidity and other market conditions. Also, the session range for EUR/CHF has not been included since the Swiss franc has been pegged to the euro at 1.2000 during the period.

Here are some tips you should know about trading during the New York session:

  • There is high liquidity during the morning, as it overlaps with the European session.
  • Most economic reports are released near the start of the New York session. Remember, about 85% of all trades involve the dollar, so whenever big time U.S. economic data is released, it has the potential to move the markets.
  • Once European markets close shop, liquidity and volatility tends to die down during the afternoon U.S. session.
  • There is very little movement Friday afternoon, as Asian traders are out singing in karaoke bars while European traders head off to the pub to watch the soccer match.
  • Also on Fridays, there is the chance of reversals in the second half of the session, as U.S. traders close their positions ahead of the weekend, in order to limit exposure to any weekend news.
Which Pairs Should You Trade?

Take note that there will be a ton of liquidity as both the U.S. and European markets will be open at the same time. You can bet that banks and multinational companies are burning up the telephone wires. This allows you to trade virtually any pair, although it would be best if you stuck to the major and minor pairs and avoid those weird ones.

Also, because the U.S. dollar is on the other side of the majority of transactions, everybody will be paying attention to U.S. data that is released. Should these reports come in better or worse than expected, it could dramatically shake up the markets, as the dollar will be jumping up and down.

Confused on which sessions start when? We made the next section just for you!

Best Times of Day to Trade Forex

Quick pop quiz! What time of the day are TV ratings highest? If you said during prime time, then you would be correct!

What does this have to do with trading sessions? Well, just like TV, "ratings" (a.k.a. liquidity) are at their highest when there are more people participating in the markets.

Logically, you would think that this happens during the overlap between two sessions. If you thought that way, you’d only be half right. Let’s discuss some of the characteristics of the two overlap sessions to see why.

Tokyo – London Overlap

Liquidity during this session is pretty thin for a few reasons. Typically, there isn’t as much movement during the Asian session so, once the afternoon hits, it’s pretty much a snooze fest. With European traders just starting to get into their offices, trading can be boring as liquidity dries up.

This would be an ideal time to take a chill pill, play some putt-putt or look for potential trades to take for the London and New York sessions.

London – New York Overlap

This is when the real shebang begins! You can literally hear traders crack their knuckles during this time, because they know they have their work cut out for them. This is the busiest time of day, as traders from the two largest financial centers (London and New York) begin duking it out.

It is during this period where we can see some big moves, especially when news reports from the U.S. and Canada are released. The markets can also be hit by "late" news coming out of Europe.

If any trends were established during the European session, we could see the trend continue, as U.S. traders decide to jump in and establish their positions after reading up what happened earlier in the day. You should watch out though, at the end of this session, as some European traders may be closing their positions, which could lead to some choppy moves right before lunch time in the U.S.

Best Days of the Week to Trade Forex

So now we know that the London session is the busiest out of all the other sessions, but there are also certain days in the week where all the markets tend to show more movement. Know the best days of the week to trade forex. Below is a chart of average pip range for the major pairs for each day of the week:

Pair
Sunday
Monday
Tuesday
Wednesday
Thursday
Friday
EUR/USD
69
109
142
136
145
144
GBP/USD
73
149
172
152
169
179
USD/JPY
41
65
82
91
124
98
AUD/USD
58
84
114
99
115
111
NZD/USD
28
81
98
87
100
96
USD/CAD
43
93
112
106
120
125
USD/CHF
55
84
119
107
104
116
EUR/JPY
19
133
178
159
223
192
GBP/JPY
100
169
213
179
270
232
EUR/GBP
35
74
81
79
75
91
EUR/CHF
35
55
55
64
87
76

As you can see from the chart above, it would probably be best to trade during the middle of the week, since this is when the most action happens.

Fridays are usually busy until 12:00 pm EST and then the market pretty much drops dead until it closes at 5:00 pm EST. This means we only work half-days on Fridays.

So based on all these, we’ve learned when the busiest and best days of the week to trade forex are. The busiest times are the best times to trade because they give you a higher chance of success.

Best Times to Trade:
  • When two sessions are overlapping of course! These are also the times where major news events come out to potentially spark some volatility and directional movements. Make sure you bookmark the Market Hours cheat sheet to take note of the Opening and Closing times.
  • The European session tends to be the busiest out of the three.
  • The middle of the week typically shows the most movement, as the pip range widens for most of the major currency pairs.
Worst Times to Trade:
  • Sundays – everyone is sleeping or enjoying their weekend!
  • Fridays – liquidity dies down during the latter part of the U.S. session.
  • Holidays – everybody is taking a break.
  • Major news events – you don’t want to get whipsawed!
  • During American Idol, the NBA Finals, or the Superbowl.

Can’t seem to trade during the optimal sessions? Don’t fret. You can always be a swing or position trader. We’ll get back to that later. Meanwhile, let’s move on to how you actually make money in Forex.

How to Make Money Trading Forex

Placing a trade in the foreign exchange market is simple: the mechanics of a trade are very similar to those found in other markets (like the stock market), so if you have any experience in trading, you should be able to pick it up pretty quickly.

The object of forex trading is to exchange one currency for another in the expectation that the price will change, so that the currency you bought will increase in value compared to the one you sold.

Example:

Trader’s Action EUR USD
You purchase 10,000 euros at the EUR/USD exchange rate of 1.1800
+10,000
-11,800*
Two weeks later, you exchange your 10,000 euros back into U.S. dollar at the exchange rate of 1.2500
-10,000
+12,500**
You earn a profit of $700
0
+700

*EUR 10,000 x 1.18 = US $11,800

** EUR 10,000 x 1.25 = US $12,500

An exchange rate is simply the ratio of one currency valued against another currency. For example, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one Swiss franc, or how many Swiss francs you need to buy one U.S. dollar.

How to Read a Forex Quote

Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason they are quoted in pairs is because in every foreign exchange transaction, you are simultaneously buying one currency and selling another. Here is an example of a foreign exchange rate for the British pound versus the U.S. dollar:

currency

The first listed currency to the left of the slash ("/") is known as the base currency (in this example, the British pound), while the second one on the right is called the counter or quote currency (in this example, the U.S. dollar).

When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you have to pay 1.51258 U.S. dollars to buy 1 British pound.

When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example above, you will receive 1.51258 U.S. dollars when you sell 1 British pound.

The base currency is the "basis" for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency. In caveman talk, "buy EUR, sell USD."

You would buy the pair if you believe the base currency will appreciate (gain value) relative to the quote currency. You would sell the pair if you think the base currency will depreciate (lose value) relative to the quote currency.

Long/Short

First, you should determine whether you want to buy or sell.

If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price. In trader’s talk, this is called "going long" or taking a "long position." Just remember: long = buy

If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price. This is called "going short" or taking a "short position". Just remember: short = sell.

bid ask

All forex quotes are quoted with two prices: the bid and ask. For the most part, the bid is lower than the ask price.

The bid is the price at which your broker is willing to buy the base currency in exchange for the quote currency. This means the bid is the best available price at which you (the trader) will sell to the market.

The ask is the price at which your broker will sell the base currency in exchange for the quote currency. This means the ask price is the best available price at which you will buy from the market. Another word for ask is the offer price.

The difference between the bid and the ask price is popularly known as the spread.

On the EUR/USD quote above, the bid price is 1.34568 and the ask price is 1.34588. Look at how this broker makes it so easy for you to trade away your money.

If you want to sell EUR, you click "Sell" and you will sell euros at 1.34568. If you want to buy EUR, you click "Buy" and you will buy euros at 1.34588.

EUR/USD

In this the euro is the base currency and thus the "basis" for the buy/sell. If you believe that the U.S. economy will continue to weaken, which is bad for the U.S. dollar, you would execute a BUY EUR/USD order. By doing so, you have bought euros in the expectation that they will rise versus the U.S. dollar.

If you believe that the U.S. economy is strong and the euro will weaken against the U.S. dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will fall versus the US dollar.

USD/JPY

In this the U.S. dollar is the base currency and thus the "basis" for the buy/sell. If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will rise versus the Japanese yen.

If you believe that Japanese investors are pulling money out of U.S. financial markets and converting all their U.S. dollars back to yen, and this will hurt the U.S. dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.

GBP/USD

In this the pound is the base currency and thus the "basis" for the buy/sell. If you think the British economy will continue to do better than the U.S. in terms of economic growth, you would execute a BUY GBP/USD order. By doing so you have bought pounds in the expectation that they will rise versus the U.S. dollar.

If you believe the British’s economy is slowing while the United States’ economy remains strong like Jack Bauer, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the U.S. dollar.

USD/CHF

In this the U.S. dollar is the base currency and thus the "basis" for the buy/sell. If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought U.S. dollars in the expectation that they will appreciate versus the Swiss Franc.

If you believe that the U.S. housing market weakness will hurt future economic growth, which will weaken the dollar, you would execute a SELL USD/CHF order. By doing so you have sold U.S. dollars in the expectation that they will depreciate against the Swiss franc.

Margin Trading

In forex, it would be just as foolish to buy or sell 1 euro, so they usually come in "lots" of 1,000 units of currency (Micro), 10,000 units (Mini), or 100,000 units (Standard) depending on your broker and the type of account you have (more on "lots" later).

"But I don’t have enough money to buy 10,000 euros! Can I still trade?"

You can with margin trading!

Margin trading is simply the term used for trading with borrowed capital. This is how you’re able to open $1,250 or $50,000 positions with as little as $25 or $1,000. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital.

1. You believe that signals in the market are indicating that the British pound will go up against the U.S. dollar.

2. You open one standard lot (100,000 units GBP/USD), buying with the British pound at 2% margin and wait for the exchange rate to climb. When you buy one lot (100,000 units) of GBP/USD at a price of 1.50000, you are buying 100,000 pounds, which is worth US$150,000 (100,000 units of GBP * 1.50000).If the margin requirement was 2%, then US$3,000 would be set aside in your account to open up the trade (US$150,000 * 2%). You now control 100,000 pounds with just US$3,000.

3. Your predictions come true and you decide to sell. You close the position at 1.50500. You earn about $500.

Your Actions GBP USD
You buy 100,000 pounds at the exchange rate of 1.5000
+100,000
-150,000
You blink for two seconds and the GBP/USD exchange rates rises to 1.5050 and you sell.
-100,000
+150,500
You have earned a profit of $500.
0
+500

When you decide to close a position, the deposit that you originally made is returned to you and a calculation of your profits or losses is done.

This profit or loss is then credited to your account. What’s even better is that, with the development of retail forex trading, there are some brokers who allow traders to have custom lots. This means that you don’t need to trade in micro, mini or standard lots! If 1,542 is your favourite number and that’s how many units you want trade, then you can!

Rollover

No, this is not the same as rollover minutes from your cell phone carrier! For positions open at your broker’s "cut-off time" (usually 5:00 pm EST), there is a daily rollover interest rate that a trader either pays or earns, depending on your established margin and position in the market. If you do not want to earn or pay interest on your positions, simply make sure they are all closed before 5:00 pm EST, the established end of the market day.

Since every currency trade involves borrowing one currency to buy another, interest rollover charges are part of forex trading. Interest is paid on the currency that is borrowed, and earned on the one that is bought. If you are buying a currency with a higher interest rate than the one you are borrowing, then the net interest rate differential will be positive (i.e. USD/JPY) and you will earn funds as a result.

Conversely, if the interest rate differential is negative then you will have to pay. Here is a chart to help you figure out the interest rate differentials of the major currencies. Accurate as of 07/25/2014.

Benchmark Interest Rates
Country Interest Rate
United States
0.25%
Euro zone
0.15%
United Kingdom
0.50%
Japan
0.10%
Canada
1.00%
Australia
2.50%
New Zealand
3.50%
Switzerland
0.00%
What is a Pip in Forex? What about a Pipette?

The unit of measurement to express the change in value between two currencies is called a "pip." If EUR/USD moves from 1.2250 to 1.2251, that .0001 USD rise in value is ONE PIP. A pip is usually the last decimal place of a quotation. Most pairs go out to 4 decimal places, but there are some exceptions like Japanese Yen pairs (they go out to two decimal places).

Very Important: There are brokers that quote currency pairs beyond the standard "4 and 2" decimal places to "5 and 3" decimal places. They are quoting FRACTIONAL PIPS, also called "pipettes." For instance, if GBP/USD moves from 1.51542 to 1.51543, that .00001 USD move higher is ONE PIPETTE.

As each currency has its own relative value, it’s necessary to calculate the value of a pip for that particular currency pair. In the following example, we will use a quote with 4 decimal places. For the purpose of better explaining the calculations, exchange rates will be expressed as a ratio (i.e., EUR/USD at 1.2500 will be written as "1 EUR/ 1.2500 USD")

Example :

Exchange rate ratio: USD/CAD = 1.0200

(To be read as 1 USD to 1.0200 CAD or 1 USD/1.0200 CAD)

The value change in counter currency, times the exchange rate ratio = pip value

[.0001 CAD] x [1 USD/1.0200 CAD]

Or

[(.0001 CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit traded

Using this example, if we traded 10,000 units of USD/CAD, then a one pip change to the exchange rate would be approximately a 0.98 USD change in the position value (10,000 units x 0.0000984 USD/unit). (We use "approximately" because as the exchange rate changes, so does the value of each pip move)

GBP/JPY at 123.00

Notice that this currency pair only goes to two decimal places to measure a 1 pip change in value (most of the other currencies have four decimal places). In this case, a one pip move would be .01 JPY.

(The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency)[.01 JPY] x [1 GBP/123.00 JPY]

Or

[(.01 JPY) / (123.00 JPY)] x 1 GBP = 0.0000813 GBP

So, when trading 10,000 units of GBP/JPY, each pip change in value is worth approximately 0.813 GBP.

Finding the Pip Value in your Account Denomination

Now, the final question to ask when figuring out the pip value of your position is, "what is the pip value in terms of my account currency?" After all, it is a global market and not everyone has their account denominated in the same currency. This means that the pip value will have to be translated to whatever currency our account may be traded in.

This calculation is probably the easiest of all; simply multiply/divide the "found pip value" by the exchange rate of your account currency and the currency in question.

If the "found pip value" currency is the same currency as the base currency in the exchange rate quote:

Using the GBP/JPY example above, let’s convert the found pip value of .813 GBP to the pip value in USD by using GBP/USD at 1.5590 as our exchange rate ratio. If the currency you are converting to is the counter currency of the exchange rate, all you have to do is divide the "found pip value" by the corresponding exchange rate ratio:

.813 GBP per pip / (1 GBP/1.5590 USD)

Or

[(.813 GBP) / (1 GBP)] x (1.5590 USD) = 1.2674 USD per pip move So, for every .01 pip move in GBP/JPY, the value of a 10,000 unit position changes by approximately 1.27 USD. If the currency you are converting to is the base currency of the conversion exchange rate ratio, then multiply the "found pip value" by the conversion exchange rate ratio. Using our USD/CAD example above, we want to find the pip value of .98 USD in New Zealand Dollars. We’ll use .7900 as our conversion exchange rate ratio:

0.98 USD per pip X (1 NZD/.7900 USD)

Or

[(0.98 USD) / (.7900 USD)] x (1 NZD) = 1.2405 NZD per pip move

For every .0001 pip move in USD/CAD from the example above, your 10,000 unit position changes in value by approximately 1.24 NZD.

Even though you’re now a math genius–at least with pip values–you’re probably rolling your eyes back and thinking, "Do I really need to work all this out?" Well, the answer is a big fat NO. Nearly all forex brokers will work all this out for you automatically, but it’s always good for you to know how they work it out.

If your broker doesn’t happen to do this, don’t worry – you can use our Pip Value Calculator! Aren’t we awesome?

In the next section, we will discuss how these seemingly insignificant amounts can add up.

What is a Lot in Forex?

In the past, spot forex was only traded in specific amounts called lots. The standard size for a lot is 100,000 units. There are also a mini, micro, and nano lot sizes that are 10,000, 1,000, and 100 units respectively.

Lot Number of Units
Standard
100,000
Mini
10,000
Micro
1,000
Nano
100

As you may already know, the change in currency value relative to another is measured in "pips," which is a very, very small percentage of a unit of currency’s value. To take advantage of this minute change in value, you need to trade large amounts of a particular currency in order to see any significant profit or loss.

Let’s assume we will be using a 100,000 unit (standard) lot size. We will now recalculate some examples to see how it affects the pip value.

1. USD/JPY at an exchange rate of 119.80(.01 / 119.80) x 100,000 = $8.34 per pip

2. USD/CHF at an exchange rate of 1.4555(.0001 / 1.4555) x 100,000 = $6.87 per pip

In cases where the U.S. dollar is not quoted first, the formula is slightly different.

1. EUR/USD at an exchange rate of 1.1930(.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip

2. GBP/USD at an exchange rate or 1.8040(.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.

Your broker may have a different convention for calculating pip value relative to lot size but whichever way they do it, they’ll be able to tell you what the pip value is for the currency you are trading is at the particular time. As the market moves, so will the pip value depending on what currency you are currently trading.

What the heck is leverage?

he amount of leverage you use will depend on your broker and what you feel comfortable with. Typically the broker will require a trade deposit, also known as "account margin" or "initial margin." Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded.

For example, if the allowed leverage is 100:1 (or 1% of position required), and you wanted to trade a position worth $100,000, but you only have $5,000 in your account. No problem as your broker would set aside $1,000 as down payment, or the "margin," and let you "borrow" the rest. Of course, any losses or gains will be deducted or added to the remaining cash balance in your account.

The minimum security (margin) for each lot will vary from broker to broker. In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.

How the heck do I calculate profit and loss?

Let’s buy U.S. dollars and Sell Swiss francs.

1. The rate you are quoted is 1.4525 / 1.4530. Because you are buying U.S. dollars you will be working on the "ask" price of 1.4530, or the rate at which traders are prepared to sell.

2. So you buy 1 standard lot (100,000 units) at 1.4530.

3. A few hours later, the price moves to 1.4550 and you decide to close your trade.

4. The new quote for USD/CHF is 1.4550 / 1.4555. Since you’re closing your trade and you initially bought to enter the trade, you now sell in order to close the trade so you must take the "bid" price of 1.4550. The price traders are prepared to buy at.

5. The difference between 1.4530 and 1.4550 is .0020 or 20 pips.

6. Using our formula from before, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40

Remember, when you enter or exit a trade, you are subject to the spread in the bid/offer quote. When you buy a currency, you will use the offer or ask price and when you sell, you will use the bid price.

Major and Minor Currencies

The eight most frequently traded currencies (USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD) are called the major currencies or the "majors." These are the most liquid and all other currencies are referred to as minor currencies.

Base Currency

The base currency is the first currency in any currency pair. The currency quote shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF rate equals 1.6350, then one USD is worth CHF 1.6350.

In the forex market, the U.S. dollar is normally considered the "base" currency for quotes, meaning that quotes are expressed as a unit of 1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British pound, the euro, and the Australian and New Zealand dollar.

Quote Currency

The quote currency is the second currency in any currency pair. This is frequently called the pip currency and any unrealized profit or loss is expressed in this currency.

Pip

A pip is the smallest unit of price for any currency. Nearly all currency pairs consist of five significant digits and most pairs have the decimal point immediately after the first digit, that is, EUR/USD equals 1.2538. In this instance, a single pip equals the smallest change in the fourth decimal place – that is, 0.0001. Therefore, if the quote currency in any pair is USD, then one pip always equal 1/100 of a cent.

Notable exceptions are pairs that include the Japanese yen where a pip equals 0.01.

Pipette

One-tenth of a pip. Some brokers quote fractional pips, or pipettes, for added precision in quoting rates. For example, if EUR/USD moved from 1.32156 to 1.32158, it moved 2 pipettes.

Bid Price

The bid is the price at which the market is prepared to buy a specific currency pair in the forex market. At this price, the trader can sell the base currency. It is shown on the left side of the quotation.

For example, in the quote GBP/USD 1.8812/15, the bid price is 1.8812. This means you sell one British pound for 1.8812 U.S. dollars.

Ask/Offer Price

The ask/offer is the price at which the market is prepared to sell a specific currency pair in the forex market. At this price, you can buy the base currency. It is shown on the right side of the quotation.

For example, in the quote EUR/USD 1.2812/15, the ask price is 1.2815. This means you can buy one euro for 1.2815 U.S. dollars. The ask price is also called the offer price.

Bid/Ask Spread

The spread is the difference between the bid and ask price. The "big figure quote" is the dealer expression referring to the first few digits of an exchange rate. These digits are often omitted in dealer quotes. For example, the USD/JPY rate might be 118.30/118.34, but would be quoted verbally without the first three digits as "30/34." In this example, USD/JPY has a 4-pip spread.

Quote Convention

Exchange rates in the forex market are expressed using the following format:

Base currency / Quote currency = Bid / Ask

Transaction Cost

The critical characteristic of the bid/ask spread is that it is also the transaction cost for a round-turn trade. Round-turn means a buy (or sell) trade and an offsetting sell (or buy) trade of the same size in the same currency pair. For example, in the case of the EUR/USD rate of 1.2812/15, the transaction cost is three pips.

The formula for calculating the transaction cost is:

Transaction cost (spread) = Ask Price – Bid Price

Cross Currency

A cross currency is any pair in which neither currency is the U.S. dollar. These pairs exhibit erratic price behavior since the trader has, in effect, initiated two USD trades. For example, initiating a long (buy) EUR/GBP is equivalent to buying a EUR/USD currency pair and selling GBP/USD. Cross currency pairs frequently carry a higher transaction cost.

Margin

When you open a new margin account with a forex broker, you must deposit a minimum amount with that broker. This minimum varies from broker to broker and can be as low as $100 to as high as $100,000.

Each time you execute a new trade, a certain percentage of the account balance in the margin account will be set aside as the initial margin requirement for the new trade based upon the underlying currency pair, its current price, and the number of units (or lots) traded. The lot size always refers to the base currency.

For example, let’s say you open a mini account which provides a 200:1 leverage or 0.5% margin. Mini accounts trade mini lots. Let’s say one mini lot equals $10,000. If you were to open one mini-lot, instead of having to provide the full $10,000, you would only need $50 ($10,000 x 0.5% = $50).

Leverage

Leverage is the ratio of the amount capital used in a transaction to the required security deposit (margin). It is the ability to control large dollar amounts of a security with a relatively small amount of capital. Leveraging varies dramatically with different brokers, ranging from 2:1 to 500:1.

Types of Forex Orders

1. Market order

A market order is an order to buy or sell at the best available price.

For example, the bid price for EUR/USD is currently at 1.2140 and the ask price is at 1.2142. If you wanted to buy EUR/USD at market, then it would be sold to you at the ask price of 1.2142. You would click buy and your trading platform would instantly execute a buy order at that exact price.

Limit Entry Order

A limit entry is an order placed to either buy below the market or sell above the market at a certain price.

For example, EUR/USD is currently trading at 1.2050. You want to go short if the price reaches 1.2070. You can either sit in front of your monitor and wait for it to hit 1.2070 (at which point you would click a sell market order), or you can set a sell limit order at 1.2070 (then you could walk away from your computer to attend your ballroom dancing class).

If the price goes up to 1.2070, your trading platform will automatically execute a sell order at the best available price.

You use this type of entry order when you believe price will reverse upon hitting the price you specified!

Stop-Entry Order

A stop-entry order is an order placed to buy above the market or sell below the market at a certain price.

For example, GBP/USD is currently trading at 1.5050 and is heading upward. You believe that price will continue in this direction if it hits 1.5060. You can do one of the following to play this belief: sit in front of your computer and buy at market when it hits 1.5060 OR set a stop-entry order at 1.5060. You use stop-entry orders when you feel that price will move in one direction!

Stop-Loss Order

A stop-loss order is a type of order linked to a trade for the purpose of preventing additional losses if price goes against you. REMEMBER THIS TYPE OF ORDER. A stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order.

For example, you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200. This means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 the best available price and close out your position for a 30-pip loss.

Stop-losses are extremely useful if you don’t want to sit in front of your monitor all day worried that you will lose all your money. You can simply set a stop-loss order on any open positions so you won’t miss your basket weaving class or elephant polo game.

Trailing Stop

A trailing stop is a type of stop-loss order attached to a trade that moves as price fluctuates.

Let’s say that you’ve decided to short USD/JPY at 90.80, with a trailing stop of 20 pips. This means that originally, your stop loss is at 91.00. If the price goes down and hits 90.60, your trailing stop would move down to 90.80 (or breakeven).

Just remember though, that your stop will STAY at this new price level. It will not widen if market goes higher against you. Going back to the example, with a trailing stop of 20 pips, if USD/JPY hits 90.40, then your stop would move to 90.60 (or lock in 20 pips profit).

Your trade will remain open as long as price does not move against you by 20 pips. Once the market price hits your trailing stop price, a market order to close your position at the best available price will be sent and your position will be closed.

Weird Forex Orders

"Can I order a Grande extra hot soy with extra foam, extra hot split quad shot with a half squirt of sugar-free white chocolate and a half squirt of sugar-free cinnamon, a half packet of Splenda and put that in a Venti cup and fill up the "room" with extra whipped cream with caramel and chocolate sauce drizzled on top?"

Good ‘Till Cancelled (GTC)

A GTC order remains active in the market until you decide to cancel it. Your broker will not cancel the order at any time. Therefore, it is your responsibility to remember that you have the order scheduled.

Good for the Day (GFD)

A GFD order remains active in the market until the end of the trading day. Because foreign exchange is a 24-hour market, this usually means 5:00 pm EST since that’s the time U.S. markets close, but we’d recommend you double check with your broker.

One-Cancels-the-Other (OCO)

An OCO order is a mixture of two entry and/or stop-loss orders. Two orders with price and duration variables are placed above and below the current price. When one of the orders is executed the other order is canceled.

Let’s say the price of EUR/USD is 1.2040. You want to either buy at 1.2095 over the resistance level in anticipation of a breakout or initiate a selling position if the price falls below 1.1985. The understanding is that if 1.2095 is reached, your buy order will be triggered and the 1.1985 sell order will be automatically cancelled.

One-Triggers-the-Other

An OTO is the opposite of the OCO, as it only puts on orders when the parent order is triggered. You set an OTO order when you want to set profit taking and stop loss levels ahead of time, even before you get in a trade.

For example, USD/CHF is currently trading at 1.2000. You believe that once it hits 1.2100, it will reverse and head downwards but only up to 1.1900. The problem is that you will be gone for an entire week because you have to join a basket weaving competition at the top of Mt. Fuji where there is no internet.

In order to catch the move while you are away, you set a sell limit at 1.2000 and at the same time, place a related buy limit at 1.1900, and just in case, place a stop-loss at 1.2100. As an OTO, both the buy limit and the stop-loss orders will only be placed if your initial sell order at 1.2000 gets triggered.

Demo Trade Your Way to Success

You can open a demo accounts for FREE with most forex brokers. These "pretend" accounts have the full capabilities of a "real" account. The broker wants you to learn the ins and outs of their trading platform, and have a good time trading without risk. The demo account allows you to learn about the forex market and test your trading skills with ZERO risk.

You should demo trade until you develop a solid, profitable system before you even think about putting real money on the line. "Don’t Lose Your Money" Declaration

Do NOT open a live trading account until you are CONSISTENTLY trading PROFITABLY on a demo account. If you can’t wait until you’re profitable on a demo account, at least demo trade for two months. Hey, at least you were able to hold off losing all your money for two months right? If you can’t hold out for two months, just donate that money to your favorite charity or cut your hands off.

Concentrate on ONE major currency pair. It gets far too complicated to keep tabs on more than one currency pair when you first start demo trading. Stick with one of the majors because they are the most liquid which makes their spreads cheap.

You can be a winner at currency trading but, as in all other aspects of life, it will take hard work, dedication, a little luck, a lot of common sense, and a whole lot of good judgment.