Currency Pairs #

Currencies are traded in pairs. Each currency pair constitutes an individual trading product. #

• Every currency trade involves at least two different currencies. If someone is short USD, then that person must be long some other currencies at the same time.
• The value of a currency fluctuates constantly when measured against other currencies. The exchange rate of a currency pair is what forex traders trade with.

Base currency & Quote currency #

• The first currency of any currency pair is called the base currency. The second member of any currency pair is called the counter currency or quote currency.

• In the spot currency market, the order of the currencies in a currency pair is fixed. The ISO (International Organization for Standardization) determines the symbol for a currency and the order of currencies in each pair. For example, EUR/USD is the official order determined by the ISO.

  • Usually, USD is the base currency (e.g. USDJPY, USDCAD, USDCHF).
  • The exceptions are GBP, AUD, NZD and EUR where the USD is the counter currency (e.g. GBPUSD, AUDUSD, NZDUSD, EURUSD).

• The quotation EUR/USD 1.2366 means 1 EUR = 1.2366 USD, so:

  • If the EUR/USD quote changes from 1.2366 to 1.2376, EUR has increased in relative value(either USD has weakened or EUR has strengthened, or both)
  • If the EUR/USD quote changes from 1.2366 to 1.2350, EUR has decreased in relative value(either USD has strengthened or EUR has weakened, or both)

• The factors affecting the currency XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ.

The chart track the base currency #

The direction of the exchange rate is based on the base currency. If the base currency is gaining vs. the quote or counter currency, the chart will moving up,vice versa. The chart below illustrates the EUR/USD currency pair.

• left side: The exchange rate is moving higher. This means that EUR (base currency) is rising vs. USD or USD (counter currency) is falling vs. EUR.
• right side: The exchange rate is moving lower. This means that EUR (base currency) is falling vs. USD or USD (counter currency) is rising vs. EUR.

The Major Currency Pairs #

• The most traded pairs are called the Majors(EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, NZD/USD and USD/CAD). They constitute the largest share of forex market and have high liquidity.

  Currency Pair	Countries
  EUR/USD	Eurozone / US	“euro dollar”
  USD/JPY	US / Japan	“dollar yen”
  GBP/USD	UK / US	“pound dollar”
  USD/CHF	US/ Switzerland	“dollar swissy”
  USD/CAD	US / Canada	“dollar loonie”
  AUD/USD	Australia / US	“aussie dollar”
  NZD/USD	New Zealand / US	“kiwi dollar”

Major Currencies, Corresponding Central Banks & Nicknames #

Cross-Currency Pairs & The Minor Currency Pairs #

• Cross-currency pairs or Crosses are currency pairs that don’t contain the USD
• Major crosses are also known as “ minors.”

Euro Crosses #

Yen Crosses #

Pound Crosses #

Other Crosses #

Exotic Currency Pairs #

• Exotic currency pair is a thinly traded currency pair that has a non-major currency.
• Exotic pairs:
  • Higher spread
  • Low liquidity
  • Lack market depth
  • Low volumes
  • More sensitive to news

    Currency Code	Country	Currency Code	Country
    CNY	Chinese Yuan Renminbi	CZK	Czech Koruna
    TWD	Taiwanese Dollar	SGD	Singaporean Dollar
    HKD	Hong Kong Dollar	HUF	Hungarian Forint
    PLN	Polish Zloty	RUB	Russian Ruble
    THB	Thai Baht	TRY	New Turkish Lira
    AED	UAE Dirham	ARS	Argentinean Peso
    MYR	Malaysian Ringgit	AMD	Armenian Dram
    AFN	Afghanistan Afghani	GEL	Georgian Lari
    GYD	Guyanese Dollar	MZN	Mozambique new Metical
    AWG	Aruban Florin	IDR	Indonesian Rupiah
    OMR	Omani Rial	AZN	Azerbaijan New Manat
    IQD	Iraqi Dinar	QAR	Qatari Rial
    BHD	Bahraini Dinar	IRR	Iranian Rial
    SLL	Sierra Leone Leone	BWP	Botswana Pula
    JOD	Jordanian Dinar	TJS	Tajikistani Somoni
    BYR	Belarusian Ruble	KGS	Kyrgyzstanian Som
    TMT	Turkmenistan new Manat	CDF	Congolese Franc
    LBP	Lebanese Pound	TZS	Tanzanian Schilling
    DZD	Algerian Dinar	LRD	Liberian Dollar
    UZS	Uzbekistan Som	EGP	Egyptian Pound
    MAD	Moroccan Dirham	WST	Samoan Tala
    EEK	Estonian Kroon	MNT	Mongolian Tugrik
    MWK	Malawi Kwacha	ETB	Ethiopian Birr
    ZAR	South African Rand	ZWD	Zimbabwe Dollar
    BRL	Brazilian Real	CLP	Chilean Peso
    ILS	Israeli Shekel	INR	Indian Rupee
    ISK	Icelandic Krona	KRW	South Korean Won
    KWD	Kuwaiti Dinar	MXN	Mexican Peso
    PHP	Philippine Peso	PKR	Pakistani Rupee
    SAR	Saudi Arabian Riyal

Pip #

• ‘PIP’ is the unit of measurement for price.
• A pip is a percentage in point.
  • One pip is equal to 1/100th of 1 percent. It is represented as 0.0001 in a quote. (0.01 for USD/JPY)
• Pipette
  • One-tenth of a pip.
  • One fractional pip is equal to 1/1000th of 1 percent units. (also called “pipettes”). It is represented as 0.00001 in a quote.(0.001 for USD/JPY)
• The value of a pip is determined by the counter or quote currency(the second member of the currency pair), and has a fixed value in that currency. For example:

The value of 1 pip of EUR/USD: #

• Standard account: EUR/USD pip = 0.0001 × 100,000 = USD $10.00 per pip

• Mini account: EUR/USD pip = 0.0001 × 10,000 = USD $1.00 per pip

• Micro account: EUR/USD pip = 0.0001 × 1,000 = USD $0.10 per pip

• Nano account: EUR/USD pip = 0.0001 × 100 = USD $0.01 per pip

• One pip EUR/USD (Standard Account) = $10 USD

• One pip EUR/USD (Mini Account) = $1 USD

• One pip EUR/USD (Micro Account) = 10 cents USD

• One pip EUR/USD (Nano Account) = 1 cent USD

The value of 1 pip of USD/CHF #

• In a standard account: USD/CHF pip = 0.0001 × 100,000 = CHF 10.00 per pip (One pip of USD/CHF is worth 10 CHF)
• In a mini account: USD/CHF pip = 0.0001 × 10,000 = CHF 1.00 per pip
• In a micro account: USD/CHF pip = 0.0001 × 1,000 = CHF 0.10 per pip
• In a nano account: USD/CHF pip = 0.0001 × 100 = CHF 0.01 per pip

First currency = 1 #

Think of base currency as the number 1. For example, if the quote for EUR/USD is 1.5675, it means that 1 euro equals 1.5675 U.S. dollars.

• If EUR/CHF exchange rate is 1.4000, then 1 EUR = 1.4 CHF
• If GBP/USD exchange rate is 1.6160, then 1 GBP = 1.616 USD
• If AUD/NZD exchange rate is 1.3650, then 1 AUD = 1.365 NZD
• If USD/JPY exchange rate is 107.90, then 1 USD = 107.9 JPY

The pip value of USD/CHF fluctuates when it is calculated in terms of the base currency (the first member of the currency pair). For example, #

• One pip of USD/CHF is worth 10 CHF (fixed value)
• If the USD/CHF exchange rate is 1.1400, then 1 USD=1.1400 CHF. 10 CHF= 10 divided by 1.1400 = $8.771 USD. One pip of USD/CHF is worth $8.771 USD.
• If the USD/CHF exchange rate is 1.1100, then 1 USD=1.1100 CHF. 10CHF= 10 divided by 1.1100 = $9.009 USD. One pip of USD/CHF is worth $9.009 USD

Lot size #

Currencies are traded in fixed contract sizes(lot sizes).

• One Standard Lot = 100,000 Units of the Base Currency
• One Mini Lot = 10,000 Units of Currency
• One Micro Lot = 1,000 Units of Currency
• One Nano Lot = 100 Units of Currency

Margin and Leverage #

• With margin and leverage, the total dollar value of the currency you control is much larger than the value you have in your account.

  • e.g. with 100:1 leverage, a $1,000 balance controls $100,000 worth of currency.

• It allows you to trade full-sized lots with significantly less capital. It can be thought of as trading with a loan provided by the broker.

• Trading with margin & Leverage can be very risky

• Before trading with leverage, be aware:

  • You can lose more than you have invested;
  • You may have to deposit additional funds in your account on short notice to cover market losses;(Margin Call)
  • The broker might try to close your position out for you before the account goes into debit.

Leverage - Double-edged sword. #

• Every price move is magnified by leverage. Higher leverage means higher reward AND HIGHER RISK.

  • Retail FX traders usually trade with leverage to inscrease profit, because fluctuations in forex are very small.

• Calculation

  • Transaction Value = Leverage * Required Margin
  • Required Margin = Transaction Value / Leverage
  • % price change in account = % price change in market * Leverage

• Example:

  • With a $1,000 margin balance in your account
  • and a 1 percent margin requirement(100:1 leverage),
  • you can buy or sell a position worth $1000 * 100 = $100,000 (a standard lot).
  • Your account is worth 1% of the contract you control.
  • Suppose the price moves by 1 percent,
    • If you are on the right side of the move, your account value will DOUBLE
      • $1000 *[1+(1% * 100)]= $1000 + $1000 = $2000 Profit = $1000
    • If you are on the wrong side of the move, your account value will DROP TO ZERO.
      • $1000 *[1-(1% * 100)]= $1000 - $1000 = $0 Loss = $1000

• The effect of leverage

% price change in account = % price change in market * Leverage

Margin Level(Or Margin Ratio) / Margin Call - Insufficient Funds #

• Margin Level = (Equity / Used Margin) x 100%
  • FX brokers use margin levels to determine whether you can open new positions
  • Margin Level is automatically calculated by the trading platform.
  • The higher the Margin Level, the more usable margin you have.
  • The lower the Margin Level, the less usable margin you have
  • No open positions: Margin Level = 0 %
  • Margin Call Level: Margin Level = 100% (Usually)
    • If your position declines below a certain level, you may be asked to deposit money to maintain a minimum balance
    • A “Margin Call Level” is the threshold(usually 100%) set by your broker that will trigger a Margin Call.
    • Margin Call : The notification(email or text message) you recieve from the broker when your Margin Level has fallen below the threshold set by the broker(Margin Call Level).
    • When your Equity is equal to your used margin, Margin Level = 100%
    • With most FX brokers, a Margin Call will be triggered when Margin level is 100%
    • When margin level drop to 100%, you won’t be able to open new positions.
    • When the Margin Level is above 100%( Equity becomes greater than used margin), you will be able to open postions again.
    • The margin level will increase when
      1. The market begins to move in your favor.
      2. More funds are deposited
      3. Some existing positions are closed.
  • Stop Out Level or Liquidation: Margin Level = 20% (If the FX broker determines that 20% is the stop out level)
    • A “Stop Out Level” is the threshold set by your broker that will trigger a “Stop Out”.
    • A “Stop Out” is triggered when Equity is lower than a specific percentage of your Used Margin.
    • When “Stop Out” occurs, part or all of your postions will be closed automatically because margin is no longer sufficient to support the open postions.
    • A “Stop Out” is much worse than a “Margin Call”
    • When “Stop Out Level” is reached, your broker will automatically close your positions until your *Margin Level is back above the Stop Out Level.
    • The Stop Out is also known as the Margin Closeout, Liquidation
• Note: Different brokers may not have the same margin call & stop out policies.

Account Values #

• Realized P/L: Realized profit and loss from trading from positions that have been closed out
• Unrealized P/L or Floating P/L Unrealized profit and loss from positions that remain open.
• Balance or Account balance = All of your deposits - Withdrawals + Realized P/L + credits and debits from interest.
• Equity or Margin balance or Account equity or net asset value of your account = account balance + Unrealized P/L
  • It is the real-time value of your account .
• Position value = the real-time value of all of your open positions.

Bid/Ask & Spread #

• The ask or offer is the price at which the other party is willing to sell and traders can buy a currency.

• The bid is the price at which the other party is willing to buy and traders can sell a currency.

• Ask price is always higher than bid price

• Spread is the difference between ask price and bid price

  • Spread = Ask Price - Bid Price
  • The more liquid the currency pair, the lower the spread.
  • So the major curreny pairs has lower spread.
  • Usually spreads will change based on the liquidity in the market.

• Many forex brokers make money through bid/ask spread.

  • Traders pay spread as the transaction cost for a round-turn trade. (Round-turn means both a buy (or sell) trade and an offsetting sell (or buy) trade of the same size in the same currency pair.

Orders #

Traders execute trades with Orders on the trading platform.

Orders for entering positions #

Market Order #

• A market order is an order to buy or sell at the current market price.
  • Pro
    • Trades are executed immediately.
    • Guaranteed execution
  • Con
    • Often traders may not get the best price

Pending Orders #

• Pending orders are essentially contingent orders;
• They will only be filled if the market meets the condition specified.

• Limit Orders

  • Buy limit orders

    • A Trader buy at a future price below the current market price,
    • He/she specify a price that is lower than the current market price.

    • It is the maximum price he/she is willing to buy at.

  • Sell limit orders

    • A Trader sell at a future price above the current market price,
    • He/she specify a price that is higher than the current market price.
    • It is the minimum price he/she is willing to sell at.

  • User input: Quantity, Limit Price

  • Pro: It is possible get a better price with a limit order.

  • Con: Orders are not guaranteed to fill. If the market does not reach the price the trader specified, the order won’t be executed.

• Stop Orders

  Stop orders are usually used by traders who want to wait for momentum before entering a position.

  • Buy stop orders

    • A Trader buy at a future price above the current market price,
    • He/she specify a price that is higher than the current market price.

  • Sell stop orders

    • A Trader sell at a future price below the current market price,
    • He/she specify a price that is lower than the current market price.

  • User input: Quantity, Stop Price

• OCO Orders

  • OCO (One cancels the other) orders is a combination of two orders.
  • If one order is executed, the other is automatically canceled.

• OTO Orders

  • An OTO (One Triggers the Other) is the opposite of the OCO.
  • It only puts on an 2nd order when the 1st order is triggered.

Orders for closing positions #

Take profit order #

• Traders specify the price at which they are willing to exit and take profits
• This determines the amount of profit that the trader can capture.

Stop-Loss Order #

• Traders specify the price at which they can exit and stop further losses if the price move in an unprofitable direction
• Stop-Loss Order is the opposite of take profit order. It is used for reducing losses.

Trailing stop #

• A trailing stop is a type of stop loss order that adjusts stop levels as the price fluctuates.

Position: Long, Short, Flat #

• Long = a position that will benefit if the price(exchange rate) rises

• Short = a position that will benefit if the price(exchange rate) falls

• Flat = absence of a long or short position

• In forex, when you long a currency pair , for example, EUR/USD, you are actually simultaneously buying euro and selling dollar.

• When you short EUR/USD, you are simultaneously selling euro and buying dollar.

Position & Trade #

• Your current position(long, short, or flat) is the result of the trades you have placed.
  • For example,suppose you place a trade to buy 5 lots of EUR/USD, and 30 minutes later, you place another trade to buy 2 lots of EUR/USD.
  • In this case, you had 2 trades, and a long position of 7 lots of EUR/USD.
• After you open a new position, you have to close that position in order to make a profit.
• If it remains open, then you have not made a profit or loss yet.

Long and Short vs Buy and Sell #

• Long and short are more precise than buy and sell.

  • Long only means a position that will benefit if the exchange rate rises
  • Short only means a position that will benefit if the exchange rate falls

• Buy can mean different things. Suppose you want to buy EUR/USD.This could mean

  • You want to open a long position because you think the EUR/USD will move higher.
  • You’ve short EUR/USD and you’re buying to close that position.

• Sell can mean different things. Suppose you want to sell EUR/USD.This could mean

  • You want to open a short position because you think the EUR/USD will move lower.
  • You’ve long EUR/USD and you’re selling to close that position.

Long one, short the other #

When a currency trader longs a currency pair, he/she is longing the base currency and shorting counter or quote currency:

• Long USD/CAD -> long the USD and short the CAD
• Long NZD/USD -> long the NZD and short the USD
• Long EUR/USD -> long the EUR and short the USD

Conversely, when a currency trader shorts a currency pair, he/she is shorting the base currency and longing the counter or quote currency:

• Short USD/CHF -> short the USD and long the CHF
• Short GBP/CHF -> short the GBP and long the CHF
• Short AUD/JPY -> short the AUD and long the JPY

Rollover Interest #

Note: Rollover Interest affects overnight positions.

What is rollover #

• Rollover is the process through which the settlement of an open trade is rolled forward to another date.

  • Currency transactions in the FX spot market settle within 2 business days.
  • For example, if a trader sells X amount of a currency on Tuesday, he\she is should deliver X amount of the currency on Thursday.
  • However, because most trades in retail FX spot market are speculative, brokers don’t take delivery of the actual currency.
  • FX brokers usually expire open positions and roll their settlement date forward two more business days.

• Rollover is usually done automatically everyday at 5:00 pm New York time.

Effects of rollover #

• Rollover interest or swap or cost of carry is the interest rate differential between two currencies over a given period of time.

• The broker pays or charges traders the interest rate differential between the two currencies in the traded pair.

• Every currency has an interest rate, which is set by the central bank of its home country.

• If interest rate of base currency > interest rate of quote currency, traders that long the pair will earn interest (rollover credit). Traders that short will pay interest(rollover debit).

• If interest rate of base currency < interest rate of quote currency, traders that long the pair will pay interest. Traders that short will earn interest.

• Wider interest rate differentials means proportionally greater rollover interest.

• Rollover interest is also magnified by leverage, as mentioned above, with a $1,000 margin, and 100:1 leverage, you can buy or sell a position worth $1000 * 100 = $100,000 (a standard lot).

Example #

• For a currency pair XXX/YYY

• Suppose interest rate of XXX = 6.1% > interest rate of YYY = 1.1%

• Interest rate differential = 6.1% - 1.1% = 5 %

• When a currency trader longs XXX/YYY, he/she is longing XXX (the base currency) and shorting YYY (the counter or quote currency):

  • Long XXX/YYY = long the XXX(with high interest rate) and at the same time short the YYY (with low interest rate).
  • The position would earn the high interest rate while paying the low interest rate.
  • Interest rate differential is positive, traders will earn rollover interest.

• When a currency trader shorts XXX/YYY, he/she is shorting XXX (the base currency) and longing YYY (the counter or quote currency):

  • Short XXX/YYY = short the XXX(with high interest rate) and long the YYY (with low interest rate).
  • The position would earn the low interest rate while paying the high interest rate.
  • Interest rate differential is negative, traders will pay rollover interest.

Carry Trade #

• Carry trade is a popular forex trading strategy.
• In a carry trade, a trader goes long the currency pair with positive interest rate differential and short the currency pair with negative interest rate differential.

Slippage #

• Slippage occurs when the order gets filled at a price that is different from what you requested
• The more liquid the market, the less often slippage happens because more traders are present to take the other side of your trade.

Trading Time #

• FX trading sessions consist of Sydney, Tokyo, London, and New York sessions.
• Some traders prefer to differentiate sessions by names of the continent.
  • Sydney & Tokyo Sessions are treated as Asian Session.
  • London Session is also called European Session.
  • New York Session is also called North American sessions

Forex Market Hours #

• New York and London session overlap is also know as NYLON.

Trading Volume #

• Main FX Trading Sessions ranked by trading volume

  1. London session
  2. New York session
  3. Tokyo session.
  4. Sydney session

  London is considered to be the center of FOREX trading due to its favorable time zone, which allows for trading during the hours of the Asian, European, and United States markets.

• AUD pairs tend to have higher volume during the Sydney session.

• Similarly, JPY pairs tend to have higher volume during the Tokyo session.

• EUR & GBP pairs tend to have higher volume during the London session

• USD pairs tend to have higher volume during the New York session.

• Volume is highest when two trading sessions are open at the same time, especially NYLON.

• There will be gap in the weekend. This means price may move significanly when market is closed. So, it can be very risky to hold your positions at that time.

Financial centers ordered by market opening time each day #

Markets open one after another in this order each day:

1. New Zealand (Wellington/Auckland)
   • Markets in New Zealand also open earlier than other financial centers each week.
2. Australia(Sydney)
3. Japan(Tokyo)
4. Singapore & Hong Kong
5. Germany(Frankfurt)& Switzerland
6. UK (London)
7. US (New York) & Canada