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Forex Basics

Forex trading can be fun and lucrative, but professional and part-time traders will need to know some basics before they can get started with currency exchange.

Being prepared with the right tools and the right attitude should help you thrive in the wonderful market of forex trading. Here are some common terms and concepts that every forex broker or trader should be familiar with.

Exchange Rate

The value of a currency when compared to another. For example, in EUR/USD 1.3400, 1 Euro is worth 1.3400USD.

Currency Pair

The two units of currency that make up an exchange rate. Currency pairs will often be written in ISO currency codes.

Base Currency

The first currency listed in a currency pair. This term is also used to describe the currency that an account is traded in.

Counter Currency

The second currency listed in a currency pair.

ISO Currency Codes

The common shorthand abbreviations used to indicate the currency of specific countries. The main examples are listed below and used in most forex trading platforms:

  • AUD = Australian Dollar
  • CAD = Canadian Dollar
  • CHF = Swiss Franc
  • EUR = Euro
  • GBP = British Pound
  • JPY = Japanese Yen
  • NZD = New Zealand Dollar
  • USD = US Dollar

Currency Pair Terminology

The commonly used slang terms used in FX trading to describe certain currency pairs. The most popular examples are listed below:

  • AUD/USD - "Aussie Dollar"
  • EUR/USD - "Euro"
  • GBP/USD - "Cable" or "Sterling"
  • NZD/USD - "Kiwi"
  • USD/CAD - "Dollar Canada"
  • USD/CHF - "Swissy"
  • USD/JPY - "Dollar Yen"

Automatic Execution

A forex trading order that is carried out automatically. This type of order does not require dealer intervention.

Counterparty

A participant in an FX trading transaction.

Drawdown

The peak-to-trough measurement of equity that has been lost through a series of trades. It is commonly expressed in percentage.

FCM

Futures Commission Merchant. Organizations or individuals licensed by the US Commodities Futures Trading Commission (CFTC) to deal futures products and to receive money from clients in order to trade them.

Forex ECN Broker

The Electronic Communications Network of the forex. The ECN performs functions similar to those of the stock market, providing bankers, traders, and market makers a real-time forex trading platform on which to work.

Leverage

The practice of using borrowed funds in order to gear a forex trading account. By increasing leverage, you can experience greater gains or losses of funds. To calculate leverage ratio, divide total open positions by account equity.

Lot

The standard lot size per transaction. Typical lot size is 100,000 units of the base currency. Mini lots are 10,000 units, and micro lots exist as well. Some forex brokers will allow trades as small as one unit.

Manual Execution

An order that is carried out through dealer intervention.

Margin

The deposit required to open or maintain a position. Margin is often expressed in percentage.

Micro Account

An account type that trades in micro lots. Micro lots are typically 1,000 units of base currency.

Mini Account

An account type that trades in mini lots. Mini lots are typically 10,000 unites of base currency.

Pip

A currency's smallest increment. Pips are also known as points.

Pip Value

The value of the pip. It can be fixed or variable and depends on the currency pair and your FX trading account's base currency. To calculate pip value of the currency you're trading, divide one pip by the exchange rate and then multiply by the lot size. Converting pip value is easy as well; just multiply the pip value by your exchange rate.

Spread

The difference between the sell quote and buy quote. For example, for EUR/USD 1.3300/04, the spread is 4 pips. A successful forex broker or trader will need to move their positions in the direction of the trade equal to the amount of the spread in order to break even before profiting.

Standard Account

An FX trading account type that trades in standard lots. Standard lots are typically 100,000 units of base currency.

Support

A term that describes a condition where sellers are outweighed by buyers. Prices temporarily bounce off a floor.

Forex Trading Order Types

Market Order

An FX trading order that is meant to buy or sell at the current market price.

Stop-Loss Order

A forex trading order that will restrict loses at a specified level.

Limit Entry Order

An FX trading order that will purchase below the market or sell above the market at specified prices. A forex broker or trader who institutes such an order believes that the price will reverse direction after that particular point.

Stop-Entry Order

An FX trading order that will purchase above the market or sell below the market at specified prices. A forex broker or trader who institutes such an order believes that the price will continue to travel in the same direction that it is currently on.

OCO Order

A forex trading order that cancels another if executed. OCO stands for One Cancels Other.

GTC Order

An FX trading order that will stay in the market unless it is either filled or cancelled. GTC stands for Good Till Cancelled.

Forex Market Hours

The Forex market is open 24 hours, so forex brokers and traders have the opportunity to trade at any time of the night or day.

However, the most crucial and successful trading usually occurs when the market is the most active. The higher volume of trades and more active currency moves will provide the best chance for catching your trade and making some profit. Many individuals involved with forex trading won't waste their time on a calm, slow market.

Forex Trading Hours and Trading Times

New York - 8 AM to 5 PM EST
Tokyo - 7 PM to 4 AM EST
Sydney - 5 PM to 2 AM EST
London - 3 AM to 12 PM EST

The different markets do have times of overlap, yielding more potential for transactions:

New York / London - 8 AM to 12 PM EST
Sydney / Tokyo - 7 PM to 2 AM EST
London / Tokyo - 3 AM to 4 AM EST

Forex brokers and traders often get very good results trading currency pairs during times when two markets overlap. For example, trading EUR/USD or GBP/USD might show favorable return from 8 AM to 12 PM EST when the New York and London markets are both be open at the same times.

The highest volume of trades and the most chances to win occur during overlapping forex trading hours.

Visit our additional resource pages for more basic information about common economic indicators used in forex trading, such as information on Central Banks or specific indexes like the Philadelphia Fed Index or Beige Book.

Forex Trading Styles

Fundamental Analysis Trading

Visit our Forex Trading Concepts or What is Forex page for more info.

Technical Analysis Trading

A style of FX trading that involves analyzing price charts for certain technical patterns of behavior.

Range Trading

A style of forex trading in which the goal is to profit from the purchase of technical levels of support and afterward selling technical levels of resistance. The range is defined by the upper level or resistance and the lower level of support.

Scalping

A style of FX trading that involves frequent trading in order to make small gains over short periods of time. Trades can last a few seconds or minutes. Online day traders prefer this method.

Swing Trading

A style of forex trading that seeks profit from short to medium terms in swings of current trends. Trades may last from a few hours to several days.

Position Trading

A style of FX trading that means taking a long term position that reflects a long-term outlook. Trades may last from a few weeks to several months.

Discretionary Trading

A style of forex trading that involves using human judgment and decision making in every transaction.

Auto Trading

A style of FX trading that includes neither human involvement nor human decision making. A strategy is pre-programmed strategy in order to execute trades via an automatic forex trading platform. Strategies can be based on technical or fundamental analysis.

Trend Trading

A style of forex trading that seeks to profit from riding short, medium, and long term price trends.

News Trading

A style of FX trading that involves a trader attempting to profit from fundamental news announcements that have been made concerning a country's economy. The trader believes that value of the country's currency will be affected. This strategy is usually used in order to gain short-term profit immediately following announcements.