FAQ

In the foreign exchange market, currency is traded in pairs. Pairs have meaning in relation to each other so must always stay together.

In a currency pair, the first currency is called the “base currency”; the second currency is called the “quote currency” or “counter currency”. The majority of the trading volume in the FX market is represented by these 18 pairs:

There are many official currencies that are used all over the world, but there only a handful of currencies that are traded actively. In currency trading, only the most economically/politically stable and liquid currencies are demanded in sufficient quantities. The majority trades the seven most liquid currency pairs in the world.

The four majors:

• EUR/USD (euro/dollar)
• USD/JPY (dollar/Japanese yen)
• GBP/USD (British pound/dollar)
• USD/CHF (dollar/Swiss franc)

The three commodity pairs:

• AUD/USD (Australian dollar/dollar)
• USD/CAD (dollar/Canadian dollar)
• NZD/USD (New Zealand dollar/dollar)

These currency pairs, along with their various combinations, account for more than 95% of all trading in FX.

The two currencies in a pair are traded one against the other. The rate at which they are traded is called the exchange rate and is affected by currency supply and demand.

Volatility describes the level of fluctuations (moves) of an exchange rate. A currency pair that is more volatile is likely to increase or decrease in value more than one that is less volatile. Volatility of a currency pair changes over time. There are some periods when prices go up and down quickly (high volatility), while during other times they might not seem to move at all (low volatility). Commonly, the higher the volatility, the riskier the trading of the currency pair is.

PIP stands for ‘Percentage In Point’ and represents the smallest movement that a currency pair can make. A PIP is a number value. In the Forex market, the value of currency is given in pips. For example, one PIP equals 0,0001. Most currencies are priced to four numbers after the point. For example, a five pip spread for EUR/USD is 1,2530/1,2535. In the major currencies, the price of the Japanese yen does not have four numbers after the point, but two.

The spread is the difference between the buy (also called bid) price and the sell (also called ask) price. The bid price is the rate at which you can sell a currency pair, and the ask price is the rate at which you can buy a currency pair. These two prices are always given for a currency pair.

This is an order placed to sell below the current price (to close a long position), or to buy above the current price (to close a short position). Stop loss orders are an important risk management tool. A stop-loss order is designed to limit an investor’s loss on a position in a security.

When a currency trader enters into a trade with the intent of protecting an existing or anticipated position from an unwanted move in the foreign currency exchange rates, they can be said to have entered into a forex hedge. By utilizing a forex hedge properly, a trader that is long a foreign currency pair, can protect themselves from downside risk; while the trader that is short a foreign currency pair, can protect against upside risk.

Also known as ‘margin’. The required collateral that an investor must deposit to hold a position.

Also known as ‘leverage’. The required collateral that an investor must deposit to hold a position.

A request from a broker or dealer for additional funds or other collateral on a position that has moved against the customer.