Forex Trading – How to Trade the Forex Market

How to Trade the Forex Market

Whether you are a personal trader or a finance professional, the foreign exchange (forex) market, also called the currency market, is where the money flows. Forex trading reaches about $5 trillion (yes, trillion, not billion) each day.

In contrast, the bond market, which is around $700 billion daily, and the global stock trading at $200 billion daily seem quite small. The total daily value of all stock trading worldwide is roughly equal to just one hour of trading in the forex market each day.

Forex Players – Banks

There are various groups of participants in the forex market. The largest group of forex traders, based on the total dollar value of their trading, consists of commercial and investment banks. These banks engage in a significant amount of currency trading for their clients involved in international business and trade. They also act as market makers in forex trading and trade extensively with their own funds. (If a banker warns you against forex trading, you might want to inquire why, if forex is such a poor investment, their bank invests substantial amounts in the forex market.)

Forex Players – Governments

Governments, through their central banks, are also key players in the forex market. A nation's central bank often takes large positions in buying or selling its own currency to manage its relative value, combat inflation, or enhance the country's trade balance. Central bank actions in the forex market are akin to policy-driven interventions in the bond market.

Forex Players – Companies

Finally, we have individual forex traders, who are speculators trading in the forex market to earn investment profits. This group consists of a diverse range of people, from professional fund managers to small individual investors, all entering the market with different levels of skill, knowledge, and resources.

Forex Players – Traders

The forex market deals with changes in the exchange rates between currency pairs, like the euro and the US dollar, represented as Eur/Usd. In exchange rate quotations, the first currency is called the base currency, while the second is the quote currency. An exchange rate for a currency pair is shown as a number, for example, 1.1235. If Eur/Usd is quoted at 1.1235, it indicates that $1.12 (plus 35/100ths) in US dollars equals one euro.

The most commonly traded currency pairs are those that include the currencies most used globally – the US dollar (USD), the euro (EUR), the British pound (GBP), and the Japanese yen (JPY).

Learning Forex Trading – Currency Pairs

The value of a pip is influenced by the currency pair being traded and the lot size. For a standard lot, a pip typically equals $10 (US); for mini-lots, a pip is $1; and for micro-lots, a pip is worth 10 cents. While the value of a pip can vary slightly based on the currency pair, these figures are generally accurate for all pairs.

Learning Forex Trading – Pips

Generally, the smallest change in an exchange rate between two currencies is referred to as a “pip”. For most currency pairs, which are quoted to four decimal places, a pip is equal to 0.0001. The main exception is for Japanese yen pairs, which are quoted to two decimal places, making a pip equal to 0.01. Many brokers now provide quotes to five decimal places, with the last digit representing a fractional 1/10th of a pip.