Short for percentage in points, a pip refers to the smallest possible price change within a currency pair. In addition to the majors, there also are less common trades (like exotics, which are currencies of developing countries). All forex trades involve a currency pair. These are words to know before engaging in forex trading: Forex Terms to KnowĮach market has its own language. The exchange rates in these markets are based on what’s happening in the spot market, which is the largest of the forex markets and is where a majority of forex trades are executed. The forward and futures markets are primarily used by forex traders who want to speculate or hedge against future price changes in a currency. This is done on an exchange rather than privately, like the forwards market. Similarly, traders can opt for a standardized contract to buy or sell a predetermined amount of a currency at a specific exchange rate at a date in the future. Instead of executing a trade now, forex traders can also enter into a binding (private) contract with another trader and lock in an exchange rate for an agreed upon amount of currency on a future date. This is the primary forex market where those currency pairs are swapped and exchange rates are determined in real-time, based on supply and demand. There are three different ways to trade forex, which will accommodate traders with varying goals:
Similar to stock traders, forex traders are attempting to buy currencies whose values they think will increase relative to other currencies or to get rid of currencies whose purchasing power they anticipate will decrease. Most forex trades aren’t made for the purpose of exchanging currencies (as you might at a currency exchange while traveling) but rather to speculate about future price movements, much like you would with stock trading. For example, USD to EUR conversions are listed as EUR/USD, but not USD/EUR. dollars) and conversely, if the exchange rate falls, that means the base currency has fallen in value.Ī quick note: Currency pairs are usually presented with the base currency first and the quote currency second, though there’s historical convention for how some currency pairs are expressed.
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Here’s how to interpret that information, using EUR/USD-or the euro-to-dollar exchange rate-as an example:
The following seven currency pairs-what are known as the majors-account for about 75% of trading in the forex market:Įach currency pair represents the current exchange rate for the two currencies. Other major currencies, in order of popularity, are: the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD), the Swiss franc (CHF) and the New Zealand dollar (NZD).Īll forex trading is expressed as a combination of the two currencies being exchanged. The second most popular currency in the forex market is the euro, the currency accepted in 19 countries in the European Union (code: EUR). dollar is involved in a vast majority of forex trading, so it’s especially helpful to know its code: USD. While there are more than 170 currencies worldwide, the U.S.
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How Currencies Are TradedĪll currencies are assigned a three-letter code much like a stock’s ticker symbol. Meanwhile, an American company with European operations could use the forex market as a hedge in the event the euro weakens, meaning the value of their income earned there falls. dollars (and sell euros), for example, if she believes the dollar will strengthen in value and therefore be able to buy more euros in the future. These traders don’t necessarily intend to take physical possession of the currencies themselves they may simply be speculating about or hedging against future exchange rate fluctuations.Ī forex trader might buy U.S. A vast majority of trade activity in the forex market occurs between institutional traders, such as people who work for banks, fund managers and multinational corporations.
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