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WHAT IS FOREX (FX)

 Forex (FX) is the marketplace where various national currencies are traded.
 The forex market is the largest, most liquid market in the world, with trillions
of dollars changing hands every day.
 There is no centralized location, rather the forex market is an electronic
network of banks, brokers, institutions, and individual traders (mostly
trading through brokers or banks).
Many entities, from financial institutions to individual investors, have currency
needs, and may also speculate on the direction of a particular pair of currencies
movement. They post their orders to buy and sell currencies on the network so they
can interact with other currency orders from other parties.
The forex market is open 24 hours a day, five days a week, except for holidays.
Currencies may still trade on a holiday if at least the country/global market is open
for business.
The foreign exchange market – also known as forex or the FX market – is the
world’s most traded market, with turnover of $5 trillion per day.
HOW FX TRADING WORKS
Trading forex involves the buying of one currency and simultaneous selling of
another. In forex, traders attempt to profit by buying and selling currencies by
actively speculating on the direction currencies are likely to take in the future.
FX MARKET SESSIONS
So unlike the stock or bond markets, the forex market does NOT close at the end of
each business day.
Instead, trading just shifts to different financial centers around the world.
The day starts when traders wake up in Wellington, then moves to Sydney,
Singapore, Hong Kong, Tokyo, Frankfurt, London, and finally, New York, before
trading starts all over again in Wellington!
The largest stock market in the world, the New York Stock Exchange (NYSE), trades
a volume of about $22.4 billion each day.

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Check out the graph of the average daily trading volume for the forex market, New
York Stock Exchange, Tokyo Stock Exchange, and London Stock Exchange:

Major sessions are:

 London session
 US session
 Tokyo session
ASIAN / TOKYO TRADING SESSION
Tokyo is the first forex session to open, and many large participants use the trade
momentum In Asia to develop their strategies and utilise as a gauge for future
market dynamics. Approximately 6% of the world's FX transactions are enacted in
the Asian trading session.
EUROPEAN / LONDON TRADING SESSION
London is the largest and most important forex trading session in the world, with
roughly a 34% market share of the daily forex volume. Most of the world's largest
banks keep their dealing desks in London because of the market share. The large
number of participants in the London forex market and the high value of the
transactions makes the London session more volatile than the other two forex
sessions.
The onslaught of liquidity coming in from London can greatly increase the ‘average
hourly move’ of major currency pairs such as EUR/USD.
US TRADING SESSION
The second largest trading market, New York handles approximately 16% of the
world's forex transactions. Many of the transactions in New York occurs during the
US/Europe overlap, with transactions slowing as liquidity dries up and European
traders exit the forex market.

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CURRENCIES
Currency symbols always have three letters, where the first two letters identify the
name of the country and the third letter identifies the name of that country’s
currency, usually the first letter of the currency’s name.
For Example:
US D
Country Name Currency Name

USD for instance…
US stands for United States, while D stands for dollar.
Currency Chart
CODE COUNTRY CURRENCY NICKNAME
USD United States Dollar Buck
EUR Eurozone Euro Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZD New Zealand Dollar Kiwi

CURRENCY PAIRS
All transactions made on the forex market involve the simultaneous purchasing and
selling of two currencies. These are called ‘currency pairs’, and include a base
currency and a quote currency.
MOST TRADED CURRENCY PAIRS
There are seven Major currency pairs on the forex market. Other brackets include
Minor and Exotic currency pairs, which are less commonly traded and all relatively
illiquid (i.e., not easily exchanged for cash).
MAJOR CURRENCY PAIRS
Major currency pairs are the most commonly traded, and account for nearly 80% of
trade volume on the forex market. These currency pairs could typically have low
volatility and high liquidity.
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They are associated with stable, well managed economies, are less susceptible to
manipulation and have smaller spreads than other pairs.
Major Currency pairs
EUR/USD Euro/US dollar
USD/JPY US dollar/Japanese yen
GBP/USD British pound/US dollar
USD/CHF US dollar/Swiss franc
USD/CAD US dollar/Canadian dollar
AUD/USD Australian dollar/US dollar
NZD/USD New Zealand dollar/US dollar

MINOR CURRENCY PAIRS 

When a currency pair doesn’t include the US dollar, it’s called minor currency pair or
a cross-currency pair.
Minor Currency pairs
EUR/GBP  Euro/British pound
EUR/AUD  Euro/Australian dollar
GBP/JPY British pound/Japanese yen
CHF/JPY  Swiss franc/Japanese yen
NZD/JPY  New Zealand dollar/Japanese yen
GBP/CAD British pound/Canadian dollar
 The most widely traded minor pairs consist of the euro, yen or British pound.
EXOTIC CURRENCY PAIRS
An exotic currency pair includes a major currency and the currency of a developing
economy (such as Brazil or South Africa). You won’t find exotic pairs as often as you’ll
find major or minor pairs, which means the spreads can be higher when trading
them.
Exotic Currency pairs
EUR/TRY Euro/Turkish lira
USD/HKD US dollar/Hong Kong dollar
JPY/NOK Japanese yen/Norwegian krone
NZD/SGD New Zealand dollar/Singapore dollar
GBP/ZAR British pound/South African rand
AUD/MXN Australian dollar/Mexican peso

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BASE AND QUOTE CURRENCIES

What is a base currency?

 The base currency is the first currency that appears in a forex pair quotation.
In the foreign exchange market, one currency will always be quoted in relation
to another because you are buying one while selling the other.
 The base currency will appear first, and will be followed by the second
currency, known as the quote or counter currency. The price displayed on a
chart will always be the quote currency – it represents the amount of the
quote currency you will need to spend in order to purchase one unit of the
base currency.
What is a Quote currency?
 The quote currency is the second currency listed in a forex pair. It is also
known as the counter currency.
 The price of a forex pair reflects how much it costs to purchase one unit of the
base currency by selling the quote currency.
Simply: The first currency in the pair is called the base currency, while the second
currency is called the quote or counter currency. The price of the base currency is
always calculated in units of the quote currency.
Example:

BID AND ASK PRICE

Bid Price – Used when selling a currency pair. It reflects how much of the quoted
currency will be obtained if buying one unit of the base currency.
Ask Price -Used when buying a currency pair. It reflects the amount of quoted
currency that has to be paid in order to buy one unit of the base currency.
Note: The bid price will always be smaller than the ask price.
Simply: The Bid price is the price a forex trader is willing to sell a currency pair
for. Ask price is the price a trader will buy a currency pair.
Example:

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SPREAD

The difference between the ask and the bid price is the spread.

TYPES OF SPREAD
The types of spread depend on the policy of the broker. A spread can be fixed or
floating.
Fixed spreads
Fixed spreads remain the same no matter what market conditions are at any given
time. This way you know for certain in advance how much you will pay for a trade.
Another good thing is that the broker won’t be able to widen the spread even if the
market conditions change.
Floating spreads
Floating or variable spreads, on the contrary, are constantly changing. They will
widen or tighten based on the supply and demand of currencies and the overall
market volatility. Floating spreads usually increase during the times of important
economic releases and during the bank holidays when the amount of liquidity in the
market declines. Variable spreads eliminate experiencing requotes and when the
market is calm they can be lower than the fixed ones.
PIP & PIPETTE
Definition the PIP is the Percentage In Point also known as Price Interest Point. A
PIP is the unit of measure for the change of value in the exchange rate of two
currencies.
In case of a 4 digit forex broker, a pip is normally the last decimal place of a
quotation. And for 5 Digit forex broker, it is usually the second-last digit in the
quotation.
The pictures that are shown below explain what are pips in forex trading:

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For currency pairs with 4 decimals 1 pip = 0.0001 while for YEN based pair it is 1 pip =
0.01.
Example
Assume that the EURUSD is exchanged at 1.0799 meaning that with 1 EUR you buy
1.0799 USD, if the rate changes to 1.0795 it means that there is a difference of
1.0799-1.0795=0.0004 that is 4 pips.
If the USDJPY is quoted 107.38, meaning that with 1 USD you can buy 107.38 Yen,
and then it changes to 107.40, this results in a price change of 107.40-107.38=0.02
which is 2 pips.
PIPETTE
Since the last couple of years, many brokers started to display exchange rates in 5
decimal digits. In such cases, the last digit of the exchange rate is called a “Pipette”.

So, a pipette in forex is simply the one-tenth value of a forex pip. It is only applicable
for 5 digit brokers, and pipette appears as either the fifth decimal digit (except JPY
pairs) or the third decimal place (JPY pairs) in currency pair exchange rates.
For Example, For instance, if EUR/USD moves from 1.20685 to 1.20686 (or to
1.20684), that .00001 USD movement in either way is called ONE PIPETTE.

HOW TO CALCULATE PIPS

As forex is always traded in pairs, so every currency has its own relative value against
another currency. Hence the value of pip changes depending upon the pair you
trade.
The total count of pips in a forex trade in done by subtracting the initial bid price
from the trade closing price.

So the Formula to calculate pips as follows:

Total Pips movement = Trade Closing Price - Initial Bid Price

For example, if you have placed an order for buying EUR/USD at 1.2300 and after
few hours you closed the trade at a price of 1.2350, then the total pips movement
will be 1.2350 - 1.2300 = 50 pips.

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On trading platforms, the digit representing a tenth of a pip usually appears to

the right of the two larger digits.
How to read pips

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