FOREX:

Introduction to the Forex Market

Table Of Contents

Introduction to the Forex Market........................................................... 3 Minor Currency Pairs or Cross-Currency Pairs.............................. 13

Advantages of Trading Forex................................................................... 6 Exotic Currency Pairs................................................................................. 14

What can be Traded?.................................................................................... 9 Reading an FX Quote.................................................................................. 15

Types of Currencies.................................................................................... 10 Put your knowledge to the test............................................................. 17

How a Currency Pair Works.................................................................... 11 We wish you success with your trading............................................ 18

Major Currency Pairs.................................................................................. 12

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Introduction
to the Forex
Market

It is crucial for all traders that are thinking about entering the forex and other
markets to obtain some knowledge about forex and the forex markets. This
way you will be able to identify trading opportunities and make informed
trading choices.
$5 Timing is critical and we want to assist you in how to time the markets, when to
trillion a day
anticipate to take profit and when to close a trade.

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

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.

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Introduction
Historically, the major players in the forex market were large central banks,
multinational firms and big financial institutions.

to the Forex 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

Market
trade on a level playing field.

As an example:

We are visiting the US from the UK. One GBP equals 1.30 USD. So we decide to
exchange £1,000 and we receive $1,300 at an exchange rate of $1.30.

A week later we return to the United Kingdom with $500 left. However, the
exchange rate of the GBP/USD has decreased to $1.10 for each GBP (meaning
that the USD/GBP dropped).

Therefore:

During our holiday the exchange rate changed and now £1 equals $1.10. This
means that the GBP weakened against the USD over that period of time.

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Introduction
So we exchange our $500 back to sterling at a rate of $1 for
£0.9090 (1/1.10) and receive £454.54 in return.

to the Forex By default we have just made a profit in the FX Market.

Market

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Advantages of
Trading Forex There are many benefits to trading Forex, here we have summarised a few for
you:

Continuous Operation

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, London and
finishing in New York.

24 Liquidity
7 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.

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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 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.

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

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

Low Entry Requirements

Due to the high level of leverage it is possible to open accounts with exclusive
FX brokers such as AvaTrade from as little as $100. This is a much lower entry
level than other types of investments. This too minimises your risks when
getting your feet wet in the trading world.

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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, known as the spread. 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. At AvaTrade we offer you the choice of fixed or floating spreads
also known as variable spreads and they change based on liquidity – which
are based on the lowest interbank market prices available at the moment you
place your order.

No Market Manipulation

It is nearly 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 the cause for large movements.

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What can be
Traded?

A country’s 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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Types of
Currencies
Majors & Minors 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
(USD), Japan (JPY), UK (GBP), Euro Zone (EUR), Canada (CAD), Australia (AUD),
Switzerland (CHF) and New Zealand (NZD).

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 Currencies are traded one against each other. In a currency pair the currency
to the left is called the base currency in the example below it is the EUR. The

Works currency to the right is called the secondary currency in the example would be
the USD. 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.

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Major
Currency Pairs 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 Europe / United States

USD / JPY United States / Japan

EUR GBP / USD United Kingdom / United States

USD / CAD United States / Canada

USD / CHF United States / Switzerland

USD
AUD / USD Australia / United States

NZD / USD New Zealand / United States

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Minor
Currency Pairs
Pair Countries
EUR / GBP Europe / United Kingdom

or Cross-
EUR / CHF Europe / Switzerland

EUR / CAD Europe / Canada

Currency Pairs EUR / AUD

EUR / NZD
Europe / Australia

Europe / New Zealand

Currency pairs that do not contain the EUR / JPY Europe / Japan

US Dollar are known as cross-currency GBP / JPY United Kingdom / Japan

pairs or simply “crosses”. The most active CHF / JPY Switzerland / Japan
crosses are derived from the three major
CAD / JPY Canada / Japan
non-US dollar currencies (the Euro, the
UK Pound and Yen). These currency pairs AUD / JPY Australia / Japan

are also known as minors. 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. The cost of exotic
pairs can be higher due to the lack of liquidity in these markets.

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.

Let’s look at an example:

Going back to the popular trading pair – the EUR/USD. Once logged into the
platform the trader will check the ask and bid prices; for the purpose of the
example they will be 1.2356 (bid), and 1.2359 (ask). The difference, as noted,
is of 3 pips and this will go to the broker. If the trader believes the Euro will go
up he will enter a ‘buy’ command. Then he will be required to select an amount
– say 10,000 units. The price for that is $12,356, and using leverage it comes
to $30.89. If the market responded the way the trader predicted and the Euro
rose from 1.2356 to 1.2360 – 4 pips, the trader would have made a profit from
this trade.

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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
• The ask price is the best available price at which we can buy from the market.
1.73 59 So to re-iterate: 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
SELL trade.

1.73 34 In this case we can see the EUR/USD has a ask price of 1.2359 and bid price of
1.2356. The difference between the two is 0.0003 or what we call 3 pips.

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Put your
knowledge to
the test
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 Wishing you successful trading
The Team at AvaTrade

The content in this e-book is for general informational purposes only and is not intended to
provide trading or investment advice. AvaTrade/Sharp Trader 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.

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