Introduction to Forex Trading
LXFX provides you with easy-to-use learning resources.
Understanding Forex Quotes
- 1. The first currency is the base currency.
- 2. The value of the base currency is always in units of 1.
Base Currency in Major Currency Pairs with the U.S. Dollar
As a key player in the forex market, the U.S. Dollar is often used as the base currency in forex quotes. When the U.S. Dollar is the base currency, you can think of the forex quote as representing how much one unit of the U.S. Dollar is worth in another currency. When the U.S. Dollar is the base currency, an increase in the exchange rate means the U.S. Dollar is appreciating, and simultaneously, the other currency is depreciating. The rise in the quote indicates that the U.S. Dollar can now be exchanged for more of the other currency than before.
Base Currency in Major Currency Pairs without the U.S. Dollar
The base currency can also be currencies other than the U.S. Dollar, such as the British Pound (GBP), Australian Dollar (AUD), or Euro (EUR). When the U.S. Dollar is not the base currency, an increase in the quote indicates the depreciation of the U.S. Dollar. The U.S. Dollar can now purchase fewer units of the other currency than before. In other words, an increase in the currency quote represents the appreciation of the base currency, while a decrease in the currency quote indicates the depreciation of the base currency.
Cross Currency Pairs
If a currency pair does not include the U.S. Dollar, it belongs to cross currency pairs.
Similar to other markets, forex quotes consist of bid and ask prices. The difference between the bid and ask prices is known as the spread, and brokers profit from this spread during trading.
Bid Price (Bid): the price at which you sell the base currency.
Ask Price (Ask): the price at which you buy the base currency.
The spread is the difference between the bid and ask prices, serving as the cost of trading. In the forex market, spreads are relatively low compared to other markets, making trading cost-effective for small price fluctuations.
What is a "Pip"?
Forex quotes often fluctuate and are measured in "pips," where one pip refers to the fourth decimal place or 1/100 of 1%.
The last digit in exchange rates is called a pip. For example, in USD/JPY with a quote of 119.11, the last two digits (0.01) are considered one pip. This is the smallest fundamental unit of exchange rate movement. The exception is the Japanese Yen, where a pip represents the second decimal place.
Although LXFX's online forex trading platform automatically calculates profits and losses for investors, it's recommended to understand the basic principles of forex trading profit and loss calculation.
The following example illustrates the process of profit and loss calculation:
Assume the current quote for EUR/USD is 1.2801/03, meaning you can buy 1 Euro for 1.2803 US Dollars or sell 1 Euro for 1.2801 US Dollars.
Suppose you predict that the Euro will appreciate against the US Dollar, so you decide to buy EUR (sell USD) and wait for the exchange rate to rise. You purchase 100,000 Euros using 128,030 US Dollars (100,000 x 1.2803). With a leverage ratio of 100:1, your margin account needs to have 1,280 US Dollars. When the market moves as expected, EUR/USD rises to 1.2807/09. To realize a profit, you sell 100,000 Euros at 1.2807, gaining 128,070 US Dollars.
You initially bought 100,000 Euros with 128,030 US Dollars and sold 100,000 Euros to receive 128,070 US Dollars. The difference is 4 pips or 40 US Dollars ($128,070 - $128,030 = $40).
Total Profit: $40
In the same example, if EUR/USD drops to 1.2795/97 when you bought 100,000 Euros with 128,030 US Dollars, you decide to exit at this point to minimize losses. You sell 100,000 Euros and receive 127,950 US Dollars.
You initially bought 100,000 Euros with 128,030 US Dollars and sold 100,000 Euros to receive 127,950 US Dollars. The difference is 8 pips or 80 US Dollars ($128,030 - $127,950 = $80).
Total Loss: $80
U.S. Dollar
Most gold prices are quoted in U.S. Dollars. Changes in gold prices are influenced partly by the strength or weakness of the U.S. Dollar and partly by the market supply and demand for gold as a commodity.
Political Turmoil
Political events can significantly impact gold prices. For example, conflict events in the Middle East may trigger concerns about the safety of bonds or currencies in that region. Investors, as a risk-avoidance measure, may withdraw funds to buy gold. The prices of oil and other commodities may also be affected, creating a ripple effect on the gold market, pushing gold prices to follow the trend of oil prices.
Global Financial Crises
When there is instability in the financial systems of major Western countries, funds worldwide tend to flow into gold, increasing demand and causing gold prices to rise. Gold serves as a safe haven during such times. Confidence in gold by investors tends to decrease when the financial system stabilizes, leading to a decline in gold prices.
Supply and Demand for Gold
Gold prices are based on the principle of supply and demand. If gold production increases significantly, prices may be affected and fall. However, if factors such as prolonged strikes by miners halt production growth, gold prices usually appreciate in situations where demand exceeds supply.