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When learning how to trade Forex, getting a good grasp of the basic terminology will help you better understand how Forex Trading works.
Before getting started, let’s look at a few facts about the Forex market. As a beginner, you may be wondering what is Forex and how does it work?
Firstly, the Forex market is the most liquid in the world, with a volume of over $5 trillion being traded daily. This volume is much higher than that of the New York Stock Exchange or the London Stock Exchange!
Trading Sessions
One of the major reasons behind why the Forex market’s popularity is that it’s open for trading 24/5. Often dubbed "the market that never sleeps", Forex market times are open at any given time in a different part of the world, excluding weekends.
Forex market times are driven by four major local sessions: London, New York, Sydney and Tokyo, with the following times:
- London - 8 am to 5 pm UTC
- New York - 1 pm to 10 pm UTC
- Sydney - 10 pm to 7 am UTC
- Tokyo - 12 am to 9 am UTC
Trading volumes do vary between one session and another, but the highest volume occurs during the London and New York sessions overlap! As a decentralised market, Forex trading is highly accessible to people around the world and many investors and traders can participate in the market online.
Indeed, the internet has revolutionised the Forex market and a majority of transactions occur through an online network instead of on exchange floors.
Currency Pairs
In Forex, currencies are always traded in pairs. Traders buy a currency that they think will increase in price, while selling another that they think will decrease. These pairs can be divided into three types: Majors, Crosses and Exotics.
As the name implies, the Major Currency pairs are the ones that are most frequently traded. These include a major currency paired with the US Dollar, which is the most highly traded currency by volume.
In fact, the US Dollar forms part of approximately 80% of all Forex Transactions. The other currencies that are considered major are the Euro (EUR), British Pound (GBP), Japanese Yen (JPY), Swiss Franc (CHF), Canadian Dollar (CAD), Australian Dollar (AUD) and New Zealand Dollar (NZD).
Secondly, Cross-currency pairs are those pairs that do not include the US Dollar. The most frequently traded pairs include the Euro and the British Pound, but these may vary to include other currencies too.
Exotic currency pairs, on the other hand, often include major currencies paired with currencies from emerging markets, such as the British Pound and the South African Rand (GBP/ZAR) and the US Dollar with the Hong Kong Dollar (USD/HKD).
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Fun Fact: The GBP/USD Major Currency Pair is called the ‘Cable’ in Forex. Why? Because before the satellites and fibre optics were invented, the London Stock Exchange and the New York Stock Exchange were connected through a massive steel cable crossing the Atlantic Ocean!
Bulls and Bears
Forex traders are often categorised as bulls and bears. Bulls refer to those traders who believe the market will go upwards, while bears are those who think the market will go downwards. These names come from the visual representation of the two animals - a bull strikes with its horns upwards, and a bear swipes with its paw downwards.
Similarly, the terms "bullish" and "bearish" are used to describe markets showing a downwards or upwards trend respectively. These terms can also be applied when describing market sentiment.
Market Sentiment is a useful tool to help traders open better positions in CFD Trading. You can get Live Market Updates directly from EagleFX’s Instagram page or website at https://www.eaglefx.com !
Percentage In Point - PIP
If you’ve read any article about Forex trading, you’ve definitely come across this one before. But what is a PIP in Forex terms? Essentially, PIP is an acronym for "Percentage In Point", which refers to a very small movement in an exchange rate of any given currency pair.
Currency exchange rates are usually quoted to four or five decimal points in order to increase accuracy. The PIP is simply the fourth decimal on a price quote which indicated a small change in a currency’s price value.
PIPs are valuable in Forex as even the smallest movement can result in huge profits or losses, due to the possibility of trading Forex with high leverage. Leverage allows traders to open larger positions than the funds in their account would usually cater for. For example, if you use a leverage setting of 1:200, you can open a position worth $20,000 by inputting just $100!
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Quotes and Spreads
When looking at Currency Pairs, you will notice two price "quotes". These are called the Bid Price and the Ask Price, or the Buy Price and the Sell Price. The Buy price is how much you’d pay the broker to buy the quote currency (ie. the first currency in the pair), and the Sell price is how much you’d pay the broker to sell the quote currency.
Keep in mind that you always buy one currency while selling another. So, with EUR/USD, you would buy Euros and sell Dollars if you think the value of Euro will increase, and you would sell Euros and buy Dollars if you think the price of Euro will decrease!
The difference between the Ask and the Bid Price is called the Spread and is measured in PIPs.
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