Seven Wonders is a CFD broker specializing in global forex trading services
Seven Wonders is a CFD broker specializing in global forex trading services
Forex trading means selling one currency to buy another. Therefore, forex market quotes are always given in pairs, indicating the currencies being bought and sold. Each currency is represented by a three-letter code, typically consisting of two letters representing the region and one letter representing the currency itself.
For example, the GBP/USD currency pair refers to the exchange between the British Pound and the US Dollar. In other words, we sell US Dollars to buy British Pounds.
Base Currency and Quote Currency
The first currency in a forex pair is called the base currency, while the second currency is called the quote currency. The price of the forex pair represents the value of one unit of the base currency in terms of the quote currency. Therefore, in the above example, the British Pound is the base currency and the US Dollar is the quote currency. If the exchange rate of GBP/USD is 1.35361, then 1 British Pound is worth 1.35361 US Dollars.
If the exchange rate of GBP to USD rises, then 1 British Pound is worth a higher price in US Dollars, and the price of the currency pair will also increase. If the exchange rate falls, the price of the currency pair will decline as well. Therefore, if you believe that the base currency in the currency pair may strengthen against the quote currency, you can buy the currency pair (go long). If you believe it will weaken, you can sell the currency pair (go short).
The forex spread refers to the difference between the buying and selling prices quoted for a forex currency pair.
Like other financial markets, when you open a position in forex, you will see two sets of prices. If you want to go long (take a long position), you can trade at the buy price, slightly above the market price. If you want to go short (take a short position), you can trade at the sell price, slightly below the market price.
When the price of a forex currency pair rises or falls, the unit of change is called a forex pip value. A forex pip generally refers to the minimum movement in the fourth decimal place of the currency pair exchange rate. Therefore, if the GBP/USD exchange rate moves from 1.35361 to 1.35371, that is a change of 1 pip.
This rule has exceptions for currencies with very small denomination units, the most notable being the Japanese Yen. For the Yen, a movement in the second decimal place is considered one forex pip.
The decimal changes after the forex pip value are referred to as fractional pips (or pipettes).
Leverage allows you to trade larger amounts of currency without investing a large capital upfront.
A pip represents a very small unit of change, and while forex currency pairs tend to be very volatile, the change in magnitude is usually quite small. Therefore, forex traders either trade in large volumes (called "lots") or use leveraged trading.
One standard lot represents 100,000 units of currency. Sometimes you can choose to trade a "mini lot" or a "micro lot," which represent 10,000 units and 1,000 units of currency, respectively.
Individual forex traders do not need to actually own 100,000 British Pounds, US Dollars, or Euros to execute each trade, so many forex trading providers offer leveraged forex trading. With leverage, you do not need to pay the full amount upfront to open a position. For example, trading the EUR/GBP may only require a deposit of 0.5% of the total position size.
When closing a leveraged trade, profits or losses are calculated based on the full trade amount. While this can increase the potential for profit, it also amplifies the risk of loss, which can exceed the total margin amount.
