The trade in various currencies is called foreign exchange trading, also known as Forex trading and FX trading. When currencies fluctuate in price in relation to each other, it is possible to gain and lose money in the forex trade.
The foreign exchange market is a global decentralized market where huge amounts of currency is traded every trading day. The trading is decentralized; there is not one single market place where all the trading is taking place. This also mean that trading is carried out 24/7. Some major market places close during weekends and bank holidays, but online retail trading platforms usually stay open every day of the year.
In terms of volume, the foreign exchange market is the largest market in the world by a wide margin. It is for instance much bigger than the world’s stock markets in terms of volume. The liquidity is enormous, especially for the eight most commonly traded currencies. Generally speaking, the FX market is characterized by very small spreads.
Data from the “Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity” show that for April 2013, trading in foreign markets averaged the equivalent of $5.3 trillion per day. For that month, the most actively traded instrument was FX Swaps, averaging $2.2 trillion per day. The second-most actively traded instrument was FX Spots, averaging $2.0 trillion per day.
The main in powerhouses of the foreign exchange market are the large banks that trade on the interbank level. You can read more about them and other important traders on our page “Major players on the FX market” on this site. However, you don’t have to be a bank or even a millionaire to trade in currencies. As a small hobby trader you won’t get access to the interbank level of trading, but there are a lot of trading platforms available online for small and mid-sized FX traders. You sign-up, make a deposit and start trading from the comfort of your own home. Some trading platforms even have mobile apps for smartphones and tablets.
The basics of being an FX trader
Currency pairs and quotes
What does all these cryptic things on the retail FX trading platform mean?
EUR/CAD 1.5414 means that the quoted price of 1 Euro is 1.5414 Canadian dollars. To put it in other words, the exchange rate is 1:1.5414 for these two currency.
Every currency on the FX market has a unique three letter code; the one established by the ISO 4217 standard. EUR denotes Euro, CAD is Canadian dollar, USD is United States Dollar, JPY is Japanese yen, CHF is Swiss franc, and so on.
All trades on the FX market is carried out in the form of currency pairs. The EUR/CAD, USD/CHF and EUR/JPY listed above are all examples of currency pairs. The first currency in the pair is the base currency and the second currency in the pair is the counter currency.
The most traded currency pairs on the FX market are these:
If you try out several trading platforms, you might notice that not all of them write the currency pairs as EUR/USD, USD/JPY and so on. Some platforms prefer not to use the slash, and will thus write the currency pairs as EURUSD, USDJPY,, GBPUSD, etc. The first currency is still the base currency, followed by the counter currency.
Examples of currency pair nicknames
|Barney (Barney Rubble)||USD/RUB|
|Betty (Betty Rubble)||EUR/RUB|
|Chunnel (a portmanteau of Channel Tunnel)||EUR/GBP|
|Kiwi (or The Bird)||NZD/USD|
|Yuppy (or Euppy)||EUR/JPY|
Warning! In London, traders are more likely to use Betty as a nickname for GBP/USD than for EUR/RUB because of cockney rhyming slang. GBP/USD = cable = Betty Grable = Betty.
What’s a forex pip?
A forex pip is the unit for exchange rate changes for a currency pair.
- The exchange rate for the currency pair EUR/USD changes from 1.0790 to 1.0796. This is a six pip change. The price of 1 EUR increased from 1.0790 USD to 1.0796 USD, a six pip increase.
- The exchange rate for the currency pair EUR/USD changes from 1.0790 to 1.0788. This is a two pip change. The price of 1 EUR decreased from 1.0790 USD to 1.0788 USD, a two pip decrease.
For most major currencies on the F market, one pip is one unit of the 4th decimal point, since they are priced in four decimal planes. A notable exception to this is the Japanese Yen, where one pip is one unit of the 2nd decimal point since the Japanese Yen (JPY) is priced in second decimal planes. Example: The exchange rate for EUR/JPY moves from 141.126 to 141.146. This is a two pip move and not a twenty pip move.
These are all examples of commonly traded currency pairs where one pip is one unit of the 4th decimal point:
Some FX trading platforms display fractional pips
To avoid confusion, it is important to know that some FX trading platforms will display changes down to 1/10 pip. They will display currency pairs that involves the JPY down to the 3rd decimal, and most other currency pairs down to the 5th decimal.