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News
Mastercard’s shares decline despite upbeat results
News
Tesla’s stock surges after upbeat Q4 print
News
Is there a golden opportunity with Shopify?
News
Investors unimpressed by Microsoft’s earnings beat
News
How should you play the NASDAQ 100’s moment of truth?
News
Baker Hughes shares decline amid weak Q4 print

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06. The basics of FX: six things to know when you start

Disclaimer: This article is an educational guide to CFD trading and the financial markets and should not be considered as advice. Trading CFDs is high risk. Always ensure you understand the potential risks and rewards associated with trading before you trade.

 

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The forex market is the only financial market that remains open 24 hours a day. This is because of the time zone differences, with the market opening with the Sydney session and closing with the New York session. Forex is also the most liquid financial market in the world. Interestingly, forex trading differs from trading any other instrument because currencies are always traded in pairs.

Ready to make your first foray into this arena? Here are the most important things beginners should know before they trade forex.

 

Did you know?

You can trade more than 60 forex pairs with ADSS. We offer leverage up to 500:1 on some pairs, plus spreads as low as 0.7 pips on selected pairs.

 

1. What Constitutes a Currency Pair?

A currency pair consists of a base currency and a quote currency. The price is quoted in terms of the quote currency and tells you how much of the base currency you will need to buy one unit of the quote currency.

 

For example, if you were trading the EUR/USD (euro/US dollar) pair. The EUR is the base currency, and the USD is the quote currency. So, if the price quoted is 1.1140, it means that you will be able to buy $1 with €1.1140.

 

2. Types of Currency Pairs

Currency pairs are classified as major, minor or exotic, based on their global trade volumes and the types of currencies included in the pairs.

 

Did you know?

Many currencies and even currency pairs have their own nickname. For example, the Canadian dollar is also called the Loonie because the reverse of the C$1 coin has a picture of a loon (a type of bird).

 

Major Pairs

These are pairs that see the highest trade volume. They usually include USD as one of the currencies in the pair.

 

Currency Pair Nickname Base Currency Quote Currency
EUR/USD Fiber euro US dollar
USD/JPY Gopher US dollar Japanese yen
GBP/USD Cable Great British pound US dollar
USD/CHF Swissie US dollar Swiss franc
AUD/USD Aussie Australian dollar US dollar
USD/CAD Loonie US dollar Canadian dollar
NZD/USD Kiwi New Zealand dollar US dollar

 

Did you know?

USD is the most traded currency, accounting for 80% of forex trade volumes. And 24% of global forex trade involves EUR/USD.

 

Minor Pairs

These currency pairs see lower trading volumes than majors. Most do not include USD but do include currencies associated with developed economies.

 

Currency Pair Nickname
EUR/GBP Chunnel
EUR/JPY Yuppy
GBP/JPY Guppy
NZD/JPY Kiwi/Yen
CAD/CHF Loonie/Swissy
AUD/JPY Aussie/Yen

 

Exotic Pairs

These currency pairs see the lowest trade volumes, accounting for about 10% of all forex trading. These usually include a currency of an emerging economy. Some examples of exotic pairs are USD/CNH, USD/MXN, and EUR/TRY.

 

3. Bid Price and Ask Price

This is the first trading term that you should be familiar with. The bid price is the price a buyer will pay to buy a currency, while the ask price is the price a seller will sell a currency at. Generally, the ask price tends to be higher than the bid price.

 

4. Spreads and Pips

The difference between the ask and bid prices is known as the spread. This is the cost of trading forex. The narrower the spread, the cheaper the trade.

For example, let’s take the GBP/USD pair. Suppose the ask price is 1.3554 and the bid price is 1.3556. The difference between the two prices is 1.3556 – 1.3554 = 0.0002. So, the spread that you pay to trade this pair is $0.0002 per unit of currency bought or sold.

A pip or point in percentage measures the change in value of the currency pair. It is the smallest possible movement in value and is usually calculated up to the 4th decimal place. The only exception is the Japanese yen, for which the price is calculated to the second decimal place.

 

5. Factors Affecting Currency Prices

Economic and geopolitical events impact interest in a specific currency and, therefore, its value. Some of the factors that have the most impact on forex rates are:

  • Central bank monetary policy changes:
    When a central bank of a nation increases interest rates, it attracts buyers to the domestic currency, driving up its value.
  • Inflation rate:
    Inflation has a direct impact on the domestic currency’s value. Rising inflation tends to weaken the currency.
  • Economic health of the nation:
    When the GDP and employment rates improve, it indicates a growing economy. This often has a positive impact on the currency.
  • Government debt:
    For a country, borrowing more than it is lending signals a weakening economy, which tends to weaken its domestic currency.

 

Did you know?

The US NonFarm Payroll (NFP) report, released on the first Friday of every month, is one of the biggest market movers in forex.

 

6. Analysing the Market

Informed trading decisions depend on two major types of analyses:

 

Fundamental Analysis

This is the study of intrinsic factors, economic data, latest news and events of the nation the currency belongs to. Major economic announcements, national events, economic crises, and general market sentiment impact forex rates.

 

Technical Analysis

This is the study of historical price movements to predict future price direction. It uses charts to provide a visual and easy-to-understand depiction of price trends and patterns. The three most commonly used types of charts are line charts, candlestick charts and bar charts. Different types of technical indicators are used to deduce market trends and predict price movements from these charts. Some of the popular ones include Bollinger Bands, Moving Averages, Relative Strength Index and Stochastic Oscillator.

Read more about these types of analysis here.

Key Takeaways

  • Forex trading requires an understanding of the forex market and its most commonly used terms.
  • Major currency pairs offer the highest liquidity since they see the highest trading volumes.
  • The cost of trading includes not just the commission that may be charged by the broker but also the spread.
  • Forex trading also requires familiarity with technical and fundamental analysis. This is conveniently done from online trading platforms like MT4 and MT5.

 

Open a live account with ADSS and gain access to more than 60 currency pairs on the most popular trading platform, MT4.

Learn. Explore. Pursue more.

 

Join our trading community to access our free weekly webinars, and our library of tutorial videos and how-to guides. Designed to help you navigate the index, forex, equities, cryptocurrency and commodities markets, analyse the latest news and insights and become a better trader.

 

01. The Difference between Technical and Fundamental Analysis

 

Technical and fundamental analysis are the foundations of informed trading. Here’s what you need to know about them.

02. The Beginner’s Guide to Charts in Trading
 

Charts are an excellent way to gain insight into the markets at a single glance. They are powerful tools for online trading.

03. Things to know before placing a trade on MT4
 

Ready to start your trading journey with our bespoke version of the award-winning platform?

04. How does CFD trading actually work?
 

Why is CFD trading so popular? Learn how to use Contracts for Difference for trading equities, FX and more.

05. What are Indices and How Do You Trade Them?
 

Not sure what stocks to trade? Start with an index such as the Dax instead and trade a variety of them at the same time.

06. The basics of FX: six things to know when you start
 

Want to trade CFDs on forex pairs? Not sure where to start? Check out our beginner’s guide.

07. Apple? Tesla? Meta? How to start trading stocks
 

Want to know how to trade equities? Check out our simple guide on trading CFDs on some of the biggest companies in the world.

08. The Beginner’s Guide to Trading Commodities
 

Interested in trading gold, oil, silver and more? Learn about safe haven assets and more with our guide.

09. Four Things to Consider Before You Begin Crypto Trading
 

Planning on adding cryptos to your portfolio? Here’s our guide to navigating those notoriously volatile digital coins.

10. The Ultimate Trading Checklist: Pro tips to save you time
 

Ready to start trading? Learn about investing responsibly with our comprehensive guide.


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Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.

ADS Securities LLC (“ADSS”) is authorised and regulated by the Securities and Commodities Authority (“SCA”) in the United Arab Emirates as a trading broker for Over the Counter (“OTC”) Derivatives contracts and foreign exchange spot markets. ADSS is a limited liability company incorporated under United Arab Emirates law. The company is registered with the Department of Economic Development of Abu Dhabi (No. 1190047) and has its principal place of business at 8th Floor, CI Tower, Corniche Road, P.O. Box 93894, Abu Dhabi, United Arab Emirates.

The information presented is not directed at residents of any particular country outside the United Arab Emirates and is not intended for distribution to, or use by, any person in any country where the distribution or use is contrary to local law or regulation.

ADSS is an execution only service provider and does not provide advice. ADSS may publish general market commentary from time to time. Where it does, the material published does not constitute advice, or a solicitation, or a recommendation to a transaction in any financial instrument. ADSS accepts no responsibility for any use of the content presented and any consequences of that use. No representation or warranty is given as to the completeness of this information. Anyone acting on the information provided does so at their own risk.