FOREX

First Steps

Table Of
Contents

The Forex Market........................................................................................... 3

Major Currency Pairs.................................................................................. 11

Advantages of Trading Forex................................................................... 4

Minor Currency Pairs or Cross-Currency Pairs.............................. 12

Participation in the Forex Market.......................................................... 7

Exotic Currency Pairs................................................................................. 13

What is Traded?.............................................................................................. 8

Reading an FX Quote.................................................................................. 14

Major & Minor Currencies......................................................................... 9

Put your knowledge to the test............................................................. 16

How a Currency Pair Works.................................................................... 10

We wish you success with your trading............................................ 17

The Forex
Market

The foreign exchange market, also known as the FX or forex market, is the
largest and most traded financial market in the world.

$5
trillion a day

The FX market has grown to a daily trade volume of more than $5 trillion USD approximately 200 times bigger than the New York Stock Exchange.
Historically, the major players in the forex market were large central banks,
multinational firms and big financial institutions.
While these organisations are still the major players in the market, the growth
of online brokers has made it possible for anybody to access this market and
trade on a level playing field.

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Advantages of
Trading Forex
Liquidity
The FX market has huge appeal for the retail trader as it is an extremely liquid
market. A liquid market means that there are a huge number of buyers and
sellers resulting in swift trade execution both buying and selling at all times
during market hours.

Continuous Operation

24

The FX market is open 24 hours a day, 5 days a week. This means we can
open and close trades at any hour of the day, unlike in other markets, e.g.
commodities and stocks.
The highest volume of trading usually takes place as the various global markets
open throughout the day starting in Sydney, moving on to Tokyo, then
London and finishing in New York.

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Advantages of
Trading Forex

Leverage
Due to the high level of liquidity in the FX market most brokers will offer
a higher leverage than for other markets. This means that a trader only
requires a small percentage of the overall price of a position. For example, if
we had leverage of 200:1 and have $500 to invest, we could take a position of
$100,000.

FX
market

When we use leverage small movements in the price of a currency have

greater weight which can lead to greater gains on smaller investments.
However, leverage does work both ways and can magnify losses.

Low Entry Requirements

Due to the high level of leverage it is possible to open accounts with FX brokers
from as little as $100. This is a much lower entry level than other types of
investments.

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Advantages of
Trading Forex
Low Transaction Costs
FX brokers mainly generate their revenue from the difference between the buy
and sell prices. This is called the spread and due to the high trading volumes it
is quite a small fee when compared to the fees charged by a traditional stock
broker, for example.

No Market Manipulation
It is impossible for one big player to corner or manipulate the FX market due to
its size. Unlike smaller markets where a large institution may be able to affect
the price by placing a big order, the FX market is so big this will not have a
major impact.
Government decisions, policies and reports, along with other global news
stories are the most likely cause for large movements.

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Participation
in the Forex
Market

If you have ever travelled to a country that uses a different currency to your
own then you have participated in the FX market.
As an example, assume we are going on a holiday from the United Kingdom to
the US and we see that the exchange rate on offer is 1 for $1.50. This is the
equivalent of $1 equalling approximately 0.67.
We decide to exchange 1,000 for $1,500.
A week later we return to the United Kingdom with $500 left over.
During our holiday the exchange rate changed and now 1 equals $1.25. This
is the equivalent of $1 equalling 0.80. This means that the dollar strengthened
against the pound over that period of time.
So we exchange our $500 back to sterling at a rate of $1 for 0.80 and receive
400 in return.
By default we have just made a profit in the FX Market.

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What is
Traded?

A countrys currency is a direct reflection of what the market thinks about the
current and future health of its economy. A recessionary, stagnant economy
will result in a weak currency, while a growing economy will result in a strong
currency.
We are therefore speculating on the strengths and weaknesses of one
economy or country against another.

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Major & Minor

Currencies
When trading FX, currencies are abbreviated into three letter symbols. For
example the euro is the EUR, the US Dollar is the USD, and so on. Currencies
are generally split into two categories the major currencies and the minor
currencies.

The majors are the currencies of the biggest global economies the US, Japan,
UK, Euro Zone, Canada, Australia, Switzerland and New Zealand.
The majors are by far the most frequently traded currencies and make up
around 90% of the FX market.
Minor or exotic currencies are those of less prominent or emerging economies,
such as the Hong Kong Dollar, Mexican Peso, Swedish Krona and Hungarian
Forint. They are traded in smaller quantities than the majors and often the cost
of making a trade is much higher due to their illiquidity.

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How a
Currency Pair
Works

In a currency pair the currency to the left is called the base currency. The
currency to the right is called the secondary currency. The secondary currency
tells us how much it is worth against 1 unit of the base currency.
So if we say the EUR/USD is trading at 1.3000 it means 1 equals $1.30.
The base currency is the basis for the buy or the sell trade. If we believe that
the Euro will strengthen against the US Dollar we would buy the EUR/USD pair.
This means we are buying the base currency (the Euro) and simultaneously
selling the secondary currency (the US Dollar).
If we believe the Euro will weaken against the US Dollar we will sell the pair. In
this case we are selling the Euro and simultaneously buying US Dollars.
Buying the base currency is known as going long looking to profit from the
pair rising.
When we sell the base currency it is known as going short and we are trying
to profit from the currency pair falling.

10

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Major
Currency Pairs

EUR
USD

11

Major currency pairs all contain the US Dollar on one side either on the base
side or secondary side. They are the most frequently traded pairs in the forex
market. The majors generally have the lowest spread and are the most liquid.
The EUR/USD is the most traded pair with a daily trade volume of nearly 30%
of the entire FX market.
Pair

Countries

EUR / USD

Euro Zone / United States

USD / JPY

United States / Japan

GBP / USD

United Kingdom / United States

USD / CAD

United States / Canada

USD / CHF

United States / Switzerland

AUD / USD

Australia / United States

NZD / USD

New Zealand / United States

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Minor
Currency Pairs
or CrossCurrency Pairs
Currency pairs that do not contain the
US Dollar are known as cross-currency
pairs or simply crosses. The most active
crosses are derived from the three major
non-US dollar currencies (the Euro, the
UK Pound and Yen). These currency pairs
are also known as minors.

12

Pair

Countries

EUR / GBP

Euro Zone / United Kingdom

EUR / CHF

Euro Zone / Switzerland

EUR / CAD

Euro Zone / Canada

EUR / AUD

Euro Zone / Australia

EUR / NZD

Euro Zone / New Zealand

EUR / JPY

Euro Zone / Japan

GBP / JPY

United Kingdom / Japan

CHF / JPY

Switzerland / Japan

CAD / JPY

Canada / Japan

AUD / JPY

Australia / Japan

NZD / JPY

New Zealand / Japan

GBP / CHF

United Kingdom / Switzerland

GBP / AUD

United Kingdom / Australia

GBP / CAD

United Kingdom / Canada

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Exotic
Currency Pairs

Exotic currency pairs are made up of a major currency paired with the currency
of an emerging or a strong smaller economy such as Hong Kong, Singapore
and European countries outside of the Euro Zone.
These pairs are not traded as often as the majors or minors, so often the
cost of trading these pairs can be higher due to the lack of liquidity in these
markets.

13

Pair

Countries

EUR / TRY

Euro / Turkish Lira

USD / SEK

US Dollar / Swedish Krona

USD / NOK

US Dollar / Norwegian Krone

USD / DKK

US Dollar / Danish Krone

USD / ZAR

US Dollar / South African Rand

USD / HKD

US Dollar / Hong Kong Dollar

USD / SGD

US Dollar / Singapore Dollar

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Reading an FX
Quote
As we have already seen, when a currency is quoted it is paired with another
currency.
So the value of one is reflected through the value of another. The base
currency is to the left of the pair and the secondary currency is to the right.
Lets look at an example:

GBP / JPY = 149.500

In this case the Pound Sterling is the base currency and the Japanese Yen is the
secondary currency.

Therefore: 1 = 149.50

14

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Reading an FX
Quote
You may have noticed that when we trade financial instruments such as
currencies we are offered two slightly different prices.
We have the sell price (also known as the bid price) and the buy price (also
known as the ask price).
The bid price is the best available price at which we can sell to the market.
BUY
1.73

The ask price is the best available price at which we can buy from the market.

59
SELL
1.73

15

34

The difference between the two prices is what we call the spread and this is
how a broker generates revenue. It is the cost of placing a trade.
In this case we can see the EUR/USD has a bid price of 1.31819 and an ask
price of 1.31849. The difference between the two is 0.0003 or what we call
three pips.

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Put your
knowledge to
the test
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live markets today. To open a demo account, click here

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We wish you success with your trading,

The AvaTrade Team

The content in this e-book is for general informational purposes only and is not intended to
provide trading or investment advice. AvaTrade/HushTrade will not be held responsible for
any loss you may take directly or indirectly arising from any information provided through the
information in this book. Trading forex, CFDs, options and/spread betting on margin carries a high
level of risk and may not be suitable for all investors.

17

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