What Is Forex Trading
Foreign exchange (Forex, FX or currency) trading is when traders buy & sell foreign currencies with the aim of making a profit. All forex trades involve the simultaneous buying of one currency and selling of another, hence the term “currency pair“.
Forex trading is normally conducted through ‘margin trading’. Trading on margin is where a small collateral deposit (initial margin) worth a percentage of a total trade’s value, is required by the forex broker to trade. Essentially this leverage increases your buying power, allowing you to control more of the financial instrument (Forex, CFDs etc) than you’d be able to normally.
Forex is a 24-hour market for 5 days a week. It is also one of the fastest and most volatile financial markets to trade. Foreign exchange markets can also display significant short, medium and long-term trends, but most importantly are generally “moving”.
The exchange rate of a currency pair is a quotation of the relative value of one currency unit against the unit of another currency in the foreign exchange market. For example, if the aussie dollar (AUD/USD) exchange rate is quoted as 0.7565 this means that one Australian dollar (AUD) is exchanged for 0.7565 US dollars (USD).
Because currencies always trade in pairs, when a forex trader makes a trade they are always long one currency and short the other. This can be a difficult concept for those new to online forex trading to grasp. However, the key take-away point is that the relative strength or weakness between the two currencies in the pair is what determines the movement in the exchange rate.
What Is A ‘Bid-Ask Spread’?
The bid-ask spread, often simply referred to as the spread, is the difference between the buy price (also called bid) and the sell price (also called ask). Another way of thinking about it is simply the difference between the highest price that a buyer is willing to pay for the FX pair and the lowest price that a seller is willing to accept to sell the same pair.
Lets look at an example with the aussie dollar. If the bid price for the AUD/USD is 0.7215 and the ask price for the same currency pair (AUD/USD) is 0.7216, then the bid-ask spread for the AUD/USD is 0.0001 (or 1 pip).
You’ll find the bid-ask prices displayed in your online forex trading software, and on the deal ticket when opening a trade. It’s important to realise that the bid-ask spread is a cost. While it may not seem like a “fee”, it definitely is a cost to traders. This is because you must have your trade move 1 pip in you’re favour in order to be at breakeven. If you are trading one standard “full size” lot (100,000 units of the first currency in the pair) then to calculate how much each pip is worth do the following:
- Multiply 100,000 by .0001 since 1/10,000th is a pip on all major currency pairs (except JPY pairs)
100,000* .0001 = 10
- The answer is 10, however is this 10 AUD or 10 USD?
The value is always based on the “quote” currency (second currency of the pair) so in our example above a pip is equal to USD 10
- To sum up, we were using the AUD/USD pair, so pip value is in US dollars as USD is the “quote” currency (second currency in the pair). Therefore, 1 pip is worth $10 US dollars for each standard lot (100k lot) of AUD/USD.
If you did not pay commission to enter the trade then the cost of taking this AUD/USD trade is USD 10 (10 US dollars). Note the profit and loss forex traders incur is always in the quote currency. Therefore you win or lose US $10 for each pip the currency moves after entering the trade above.
The Majors (Major Currencies)
Commonly traded currency pairs are traditionally divided into two primary groups related to the currencies popularity and liquidity: Majors and Minors.
The Majors refers to the most traded currencies, and therefore most liquid, pairs of currencies in the Forex market. These generally include the following in order:
- EUR/USD (Euro / US dollar) – nicknamed the euro
- USD/JPY (US dollar / Japanese yen) – nicknamed the gopher
- GBP/USD (British pound / US dollar) – nicknamed the cable
- USD/CHF (US dollar / Swiss franc) – nicknamed the swissie or swissy
- AUD/USD (Australian dollar / US dollar) – nicknamed the aussie
- USD/CAD (US dollar / Canadian dollar) – nicknamed the loonie and
- NZD/USD (New Zealand dollar / US dollar) – nicknamed the kiwi
Best Forex Trading Platforms
Finding the best forex trading platform and reputable, Australian regulated, forex broker who actually meets your needs is not always easy! There are many online Forex brokers available all of which will have different offerings, trading platforms, pricing and the list goes on.
This is where we (Online Brokers Australia) really shine, as we only list the very best, hand-picked and reputable online foreign exchange brokers in each category. If they don’t meet our initial stringent requirements test, or don’t have a key point of difference traders are looking for… we simply won’t list them!
To easily compare FX brokers please view our top 3 comparison tables for the three leading types of foreign exchange (also referred to as Currency, Forex or FX) trading accounts available. These include the top 3 forex brokers we have reviewed in the ECN / STP forex accounts, fixed spread FX accounts and standard forex trading Australian account categories.
Forex Market Hours For Australian Currency Traders
Understanding when various currency trading sessions start and finish is important for all FX traders. There are three main FX trading sessions over a 24 hour period. Volatility and liquidity often spike at times where these sessions overlap.
Australian currency traders can view our forex trading hours chart to see the Asian (Sydney, Australia and Tokyo markets), European (London) and US (New York) trading sessions expressed in Australian eastern standard time.
Understanding Foreign Exchange Trading – ASIC Australia Resources
The Australian Securities & Investments Commission (ASIC) have provided an excellent understanding foreign exchange trading resource on their web site. ASIC is an independent Australian government body that acts as Australia’s corporate financial regulator (which covers CFDs and Forex).
The article covers essential topics such as risks involved, how to deal with FX providers and asking yourself the important question “Is online forex trading right for you”.
Learn How To Trade Forex
Learn to trade a variety of financial markets, including FX currency markets, from leading professional Australian traders. We have reviewed two quality trading courses that discuss a variety of trading strategies based on technical analysis.
Foreign Exchange Risk Notice:
Foreign exchange (also known as Forex, FX or currency) derivatives are complex, leveraged financial products and require a certain level of experience, so may not be suitable for everyone. Currency trading carries a high level of risk to your capital and can result in losses that exceed your initial deposit. Please ensure that you understand all the risks involved.
Reviews and comparisons of forex brokers are conducted independently, however FX brokers or products included on this web site may not suit your personal objectives, financial situation or needs.
If you are considering trading FX or acquiring any financial product you should obtain and read the relevant Product Disclosure Statement and/or other offer document/s prior to making any financial decision. If you are unsure of the risks, or have any doubt whether you have sufficient financial resources or experience to trade currency online or foreign exchange derivative products, you should seek professional advice before commencing online forex trading.