Forex is the market in which participants are able to buy, sell, exchange and speculate on currencies. You can also define it this way: The Forex Market (forex, FX, currency market or Foreign Market Exchange) is a global decentralized market for trading currencies. The main participants in the market are the largest international banks, commercial companies, central banks, investment management firms and, hedge funds, the retail forex brokers and investors.

In the Forex Market, the instruments traded are actually currency pairs. The symbol for a currency pair will appear like this: EUR/USD. It is usually followed by quotations like in the example bellow:

Symbol Bid Ask

EUR/USD 1.2657 1.2659

GBP/USD 1.6052 1.6055

1.2657 – is a quote (price). The difference between 1.2657 and 1.2658 is 0.0001, which is called PIP (Percentage Increment Point). It is the smallest unit of measurement for the quotation of the currency pairs (and other instruments too). You could also find a 5 digit quote.

Volume 1 lot (standard measurement for trading Forex, it is equivalent of 100.000 of the first currency in the pair – in this example 100.000 EUR. You can also trade a mini lot – 0.1 lots = 10.000 of the first currency or micro lots – 0.01 = 1000 of the first currency)

0.0001 is equal to 1 pip. The value in money for 1 pip is calculated like this:

1 pip = Volume Value * unit value (denominated in the second currency of the pair)

Volume Value = Nominal Volume (100.000 units of the first currency)*Trading Volume

E.g.If one buys/sells of EURUSD:

1 lot – 1 pip= 100.000*1*0.0001= $10; 2 pips= 100.000*1*0.0002= $20

0.1 lot – 1 pip= 100.000*0.1*0.0001= $1; 2 pips= 100.000*0.1*0.0002= $2

0.01 lot – 1 pip= 100.000*0.01*0.0001= $0.1; 2 pips= 100.000*0.01*0.0002= $0.2

The first quotation is the price at which investors sell (Bids), and the second one is the price at which investors buy (Ask). The difference between them is called spread (it is usually the cost for trading in the forex market through a brokerage house).

Using the same example, but applied as a general rule, the EUR/USD can be read: How many units from the second currency (USD) should be paid for one unit of the first currency (EUR).

Usually, the ticker – currency pair symbol – is made of: first two letters are the acronym for the country, and the third is the acronym for the name of the currency:

GBP – Great Britain/Pound

JPY – Japanese/Yen

AUD – Australian/Dollar

USD – United States/Dollar

There are also some exceptions, like EUR, or those for countries that have changed their currency value like PLN – Poland/New Zloty

Sometimes, trading in the Forex Market is confused with trading a CFD based on the Forex Market. To be an active trader in the currency exchange market you should own a currency, in order to buy and own another. If someone would just like to speculate the direction of a certain currency pair, then he will trade a CFD based on that specific currency pair.

When trading a CFD based on a currency pair, the trader should take into account the fact that leverage is applied. Let us take the next example:

EUR/USD 1.2657 1.2659

Leverage: 1:200 -> Margin requirement of 0.5%

You buy 1 lot of EUR/USD at 1.2659 (ask price). You need a margin (the margin is always calculated in the first currency of the pair) of 0.5% of 100.000, which means 500 EUR. For this transaction you will have to pay a spread of 2 pips. If the market will move from 1.2657 (bid) to 1.2659 (bid), your spread will be covered and you will find yourself on breakeven. Let us say that the market reached 1.2669 and you want to close your trade.

At this point, 1.2669 - 1.2659 (breakeven level) = 0.0010 or 10 pips.

10 pips = 100.000 * 0.0010$ = 100$

$100 would be your profit for a 10 pips, by buying a CFD on EURUSD.

The Information or materials published or submitted by Forex Rally are exclusively for educational, informative or analysis purposes and cannot be considered recommendations to purchasing/selling/keeping of a particular financial instruments. They are not and should not be treated as indications or tips on trading strategies for real or demo accounts. Forex Rally warns the Users/Clients that past performance of Financial Instruments is not an indicator of future performance. Forex Rally assumes no responsibility for the outcome of transactions based on or influenced by any of the above-mentioned information. Forex Rally warns that Financial Derivative Instruments are complex instruments and leveraged products that involve a high level of risk which can result in high losses, including the risk of losing the entire capital invested by the Client. Such instruments might not be suitable for all Clients. The Client should not engage in transactions with such Financial Instruments unless he/she understands and accepts the risks involved by trading Financial Instruments, taking into account his/her investment objectives and level of experience.