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FOREX TRADING MODULE 1

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Your starting point as a beginner to forex trading

The foreign exchange market, also known as the forex market, is the world’s most traded financial
market. We’re committed to ensuring our clients have the best education, tools, platforms, and
accounts to navigate this market and trade forex.

If you’re not sure where to start when it comes to forex, you’re in the right place.

You’ll find everything you need to know about forex trading, what it is, how it works and how to start
trading.

What is forex?
Forex is short for foreign exchange – the transaction of changing one currency into another currency.
This process can be performed for a variety of reasons including commercial, tourism and to enable
international trade.

Forex is traded on the forex market, which is open to buy and sell currencies 24 hours a day, five days a
week and is used by banks, businesses, investment firms, hedge funds and retail traders.

What is the forex market?

The forex market is by far the largest and most liquid financial market in the world, with an estimated
average global daily turnover of more than US$6.5 trillion — which has risen from $5 trillion just a few
years ago.

One critical feature of the forex market is that there is no central marketplace or exchange in a central
location, as all trading is done electronically via computer networks. This is known as an over the
counter (OTC) market.

What is forex trading?

Forex trading is the process of speculating on currency prices to potentially make a profit. Currencies are
traded in pairs, so by exchanging one currency for another, a trader is speculating on whether one
currency will rise or fall in value against the other.

The value of a currency pair is influenced by trade flows, economic, political and geopolitical events
which affect the supply and demand of forex. This creates daily volatility that may offer a forex trader
new opportunities. Online trading platforms provided by global brokers like OCTAFx mean you can buy
and sell currencies from your phone, laptop, tablet or PC.

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What is an online forex broker?

An online forex broker acts as an intermediary, enabling retail traders to access online trading platforms
to speculate on currencies and their price movements.

Most online brokers will offer leverage to individual traders, which allows them to control a large forex
position with a small deposit. It is important to remember that profits and losses are magnified when
trading with leverage.

Why trade forex?

Forex offers many benefits to retail traders.

You can trade around the clock in different sessions across the globe, as the forex market is not traded
through a central exchange like a stock market. This means you can jump on volatility, wherever it
happens. High liquidity also enables you to execute your orders quickly and effortlessly.

Trading forex using leverage allows you to open a position by putting up only a portion of the full trade
value. You can also go long (buy) or short (sell) depending on whether you think a forex pair’s value will
rise or fall.

Forex trading offers constant opportunities across a wide range of FX pairs. Our comprehensive range of
educational resources are a perfect way to get started and improve your trading knowledge.

Understanding Currency Pairs

All transactions made on the forex market involve the simultaneous buying and selling of two
currencies.

This ‘currency pair’ is made up of a base currency and a quote currency, whereby you sell one to
purchase another. The price for a pair is how much of the quote currency it costs to buy one unit of the
base currency. You can make a profit by correctly forecasting the price move of a currency pair.

Most brokers offer hundreds of combinations of currency pairs to trade including the majors which are
the most popular traded pairs in the forex market. These include the Euro against the US
Dollar/EURUSD, the US Dollar against the Japanese Yen/USAJPY and the British Pound against the US
Dollar/GBPUSD.

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Essential components of currency pair trading

Base currency
The base currency is the first currency that appears in a forex pair and is always quoted on the left. This
currency is bought or sold in exchange for the quote currency and is always worth 1.

Example , it will cost a trader 1.1918 USD to buy 1 EUR.

Alternatively, a trader could sell 1 EUR for 1.1916 USD.

Quote currency
The second currency of a currency pair is called the quote currency and is always on the right.

In EUR/USD for example, USD is the quote currency and shows how much of the quote currency you’ll
exchange for 1 unit of the base currency.

Bid price
The bid price is the value at which a trader is prepared to sell a currency. This price is usually to the left
of the quote and often in red.

The bid price is given in real time and is constantly updating as it is a live market.

Ask price
The ask price is the value at which a trader accepts to buy a currency or is the lowest price a seller is
willing to accept. This is usually to the right and in blue.

The ask price is given in real time and is constantly changing as it is a live market.

Understanding spreads and pip in forex

Spread
As a forex trader, you’ll notice that the bid price is always higher than the ask price. The difference
between these two prices is the spread. In other words, it is the cost of trading. The narrower the
spread, the cheaper it costs. The wider the spread, the more expensive it is.

For example, if EUR/USD is trading with an ask price of 1.1918 and a bid price of 1.1916, then the spread
will be the ask price minus the bid price. In this case, 0.0002.

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In order to make a profit in foreign exchange trading, you’ll want the market price to rise above the bid
price if you are long, or fall below the ask price if you are short.

What is a pip in forex?

A point in percentage – or pip for short – is a measure of the change in value of a currency pair in the
forex market.

Pips are the units used to measure movement in a forex pair. A forex pip is usually equivalent to a one-
digit movement in the fourth decimal place of a currency pair. So, if GBP/USD moves from $1.35361 to
$1.35371, then it has moved a single pip. The decimal places shown after the pip are called fractional
pips, or sometimes pipettes.

It is the smallest possible move that a currency price can change which is the equivalent of a ‘point’ of
movement.

The exception to this rule is when the quote currency is listed in much smaller denominations, with the
most notable example being the Japanese yen. Here, a movement in the second decimal place
constitutes a single pip. So, if EUR/JPY moves from ¥106.452 to ¥106.462, again it has moved a single
pip.

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What is a forex trader?

A forex trader will hold a ‘position’ in a currency pair. This is the term used to describe a trade in
progress and one that will have a profit or a loss, as the open position indicates the trader has some
market exposure

Difference between long and short positions

A long position/buy means a trader has bought a currency expecting its value to rise. Once the trader
sells that currency back to the market (ideally for a higher price than he or she paid for it).

If you wanted to open a long position on the Euro, you would purchase 1 Euro for USD 1.1918. You will
then hold your position in the hope that it will appreciate, selling it back to the market at a profit once
the price has increased.

A short position/sell refers to a trader who sells a currency expecting its value to fall and plans to buy
it back at a lower price. A short position is ‘closed’ once the trader buys back the asset (ideally for less
than he or she sold it for).

In this case, if you think the Euro will weaken against the Dollar, you will sell 1 Euro for USD 1.1916 and
hold a short position. You expect the Euro to depreciate and plan to buy it back at a lower rate.

What are the most traded currency pairs on the forex market?

There are seven major currency pairs traded in the forex market, all of which include the US Dollar in the
pair.

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You can also trade crosses, which do not involve the USD, and exotic currency pairs which are
historically less commonly traded (and relatively illiquid).

This means they often come with wider spreads, meaning they’re more expensive than crosses or
majors.

Different Groups of Currency Pairs

Major currency pairs

Major currency pairs are generally thought to drive the forex market. They are the most commonly
traded and account for over 80% of daily forex trade volume.

There are four traditional majors – EURUSD, GBPUSD, USDJPY and USDCHF – and three known as the
commodity pairs – AUDUSD, USDCAD and NZDUSD.

These currency pairs typically have high liquidity, which means they tend to have lower spreads. They
are associated with stable, well managed economies and are less prone to slippage, where the expected
price of a trade differs from the price the trade was executed at.

Cross currency pairs

Cross currency pairs, known as crosses, do not include the US Dollar. Historically, these pairs were
converted first into USD and then into the desired currency - but are now offered for direct exchange.

The most commonly traded are derived from minor currency pairs and can be less liquid than major
currency pairs. Examples of the most commonly traded crosses include EURGBP, EURCHF, and EURJPY

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Exotic currency pairs

Exotics are currencies from emerging or developing economies, paired with one major currency.

Compared to crosses and majors, exotics are traditionally riskier to trade because they are more volatile
and less liquid. This is because these countries’ economies can be more susceptible to intervention and
sudden shifts in political and financial developments.

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Overview of different currency pairs across forex trading, as well as their nicknames used in the
market

Majors
EUR/USD "fiber”

USD/JPY "gopher"

GBP/USD "cable"

USD/CHF "swissie"

AUD/USD "aussie

Minors
EUR/GBP "chunnel"

EUR/JPY "yuppy"

GBP/JPY "guppy"

NZD/JPY "kiwi yen"

CAD/CHF "loonie swissy"

Exotics
USD/MXN

GBP/NOK

GBP/DKK

CHF/NOK

CHF/NOK...

What moves the forex market?

The forex market is made up of currencies from all over the world, which can make exchange rate
predictions difficult as there are many factors that could contribute to price movements. However, like
most financial markets, forex is primarily driven by the forces of supply and demand, and it is important
to gain an understanding of the influences that drives price fluctuations here.

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How does forex trading work?

There are a variety of different ways that you can trade forex, but they all work the same way: by
simultaneously buying one currency while selling another. Traditionally, a lot of forex transactions have
been made via a forex broker, but with the rise of online trading you can take advantage of forex price
movements using derivatives like CFD trading.

CFDs are leveraged products, which enable you to open a position for a just a fraction of the full value of
the trade. Unlike non-leveraged products, you don’t take ownership of the asset, but take a position on
whether you think the market will rise or fall in value.

Although leveraged products can magnify your profits, they can also magnify losses if the market moves
against you.

What is a lot in forex?

Currencies are traded in lots – batches of currency used to standardize forex trades. As forex tends to
move in small amounts, lots tend to be very large: a standard lot is 100,000 units of the base currency.
So, because individual traders won’t necessarily have 100,000 pounds (or whichever currency they’re
trading) to place on every trade, almost all forex trading is leveraged.

What is leverage in forex?

Leverage is the means of gaining exposure to large amounts of currency without having to pay the full
value of your trade upfront. Instead, you put down a small deposit, known as margin. When you close a
leveraged position, your profit or loss is based on the full size of the trade.

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While that does magnify your profits, it also brings the risk of amplified losses – including losses that can
exceed your margin. Leveraged trading therefore makes it extremely important to learn how to manage
your risk.

What is margin in forex?

Margin is a key part of leveraged trading. It is the term used to describe the initial deposit you put up to
open and maintain a leveraged position. When you are trading forex with margin, remember that your
margin requirement will change depending on your broker, and how large your trade size is.

Margin is usually expressed as a percentage of the full position. So, a trade on EUR/GBP, for instance,
might only require 1% of the total value of the position to be paid in order for it to be opened. So
instead of depositing AUD$100,000, you’d only need to deposit AUD$1000.

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