How Forex Works

What Currencies Are Traded?

If I went through all of them it would be a very long list so I am going to tell you the top 8. When you start hanging about Forex forums and chatrooms (inevitably all Fx Ninjas do) you will need to know the pair nicknames on this list, so bookmark this page for reference:

Symbol	Currency	Country	Also Called
GBP	Pound	Britain	Sterling
USD	U.S. Dollar	America	Dollar
EUR	Euro	Euro nations	Euro
JPY	Yen	Japan	Yen
AUD	Aussie Dollar	Australia	Aussie
CHF	Franc	Switzerland	Chef, Swissy
CAD	Cad Dollar	Canda	Loonie
NZD	N.Z. Dollar	New Zealand	Kiwi

Like I said, there are other tradable currencies. However, you’re a new Ninja so you are unlikely to trade the more volatile and uncommon currencies, at this time. In fact, even when you become a fully qualified Fx Ninja, it is unlikely that you will move to the other currency pairs. Why take on new opponents when you know you can beat your current opponent, with one hand behind your back?

Hungry For Money? Eat Some Pears!

It’s ‘pairs’ newbie, get it right!

When you see a Forex quote it will always be quoted as a pair. A pair is a pairing of two currencies. A pair and it’s price is basically the summary of a sentence like this one:

One British Pound is currently worth about two U.S. dollars.

Summarized into……

One GBP unit is currently worth about Two USD units

Summarized into……

GBP vs. USD = $2.04

Summarized into……

GBP/USD = 2.0414

There are a lot of combinations of pairs such as GBP/JPY, USD/JPY and EUR/USD. Using GBP/JPY as an example we say:

OR

GBP/JPY = 238.19

Base Currency: The fist currency in a pair is referred to as the base currency. Using GBP/JPY as an example the base currency is GBP. In EUR/USD the base currency is EUR.

Quote Currency: The second currency is referred to as the quote currency. Using GBP/JPY as an example the quote currency is JPY. In EUR/USD the quote currency is USD.

Price (rate): The rate represents how many units of the quote currency are needed to buy one unit of the base currency. Using the GBP/JPY example above we can see that it will cost 238.19 Yen to buy 1 GBP.

EUR/USD = 1.4015

In this quote we can see that it takes 1.4015 USD to buy 1 EUR.

USD/CAD = 1.1181

In this example we can see that it takes 1.1181 CAD to buy 1 USD.

Long or Short

If you are new to the entire financial market scene you are probably going to have a hard time wrapping your head around this one (I know I did). You can either open a long position (buy) or a short position (sell). After a few weeks this will all seem like child’s play, so don’t stress out too much about trying to understand this now.

To start with just remember…..

Buy = Long
Sell = Short

The point of trading the Forex market is anticipating when a currencies value will go up or down. Since currencies are quoted in pairs, you need to figure out when the base currency value will go up or down in comparison to the quote currency.

So if you do your analysis (steady newbie Fx Ninja I will explain how to analyze soon) and it tells you that GBP/USD will raise in value (GBP will raise in value against USD) you need to buy (open a long).

What happens when you open a long position is you simultaneously buy the base currency and sell the quote currency. If you think about this it is really very simple. For the GBP/USD rate to go up you need GBP to rise in value and USD to fall in value. If this happens, it costs more U.S. Dollars to buy a Pound. So when you buy GBP and sell USD, and if your analysis is right, and GBP/USD goes up you close out with profit.

Now if your analysis tells you that GBP/USD will fall in value (USD will rise in value against GBP) you need to sell (open a short position). When you open a short position, you simultaneously sell the base currency and buy the quote currency. So now USD rises in value and GBP falls it will take less U.S. Dollars to buy a pound, and since you bought the Yen at a lower price and sold it at a higher price you make profit when closing that position.

This may be a little confusing right now but don’t worry too much about it. You will begin to understand it when you begin placing positions on a demo account. For now just remember:

Long or Buy = Buying the base currency and selling the quote currency.

Short or Sell = Selling the base currency and buying the quote currency.

Spreads

The simplest explanation of a spread is that a spread is one of the main ways your broker makes money from you. However, we need a more detailed explanation than that so here it is. Take a look at this quote from a Forex broker:

Forex quotes are always provided with bid and ask prices. The bid price represents the price at which your broker is willing to allow you to open a short position at. The Ask price is the price at which they are willing to let you open a long position.

Whenever you open a long position to close it you have to open a short. When you open a Short to close it you have to open a long.

So let’s take the pair above, as the example, and say we just opened a long on GBP/USD at 2.0418. If we want to sell it right now, the second we bought it, we can sell it at 2.0414. This means we immediately lose, as we sell it for less than we bought it. So as soon as you buy you are already a slight bit behind. Your goal as a trader is to wait for that price to move up. When the bid price moves up to 2.0419 you are profitable.

So if you hit the sell (short) button the broker will give you an entry at 2.0414.

If you hit the buy (long) button the broker will give you an entry at 2.0418.

The price inbetween is the spread, and that is what the broker pockets when you make a trade.

Roll Over

At about 5pm U.S. EST (time varies with some brokers) if you’re holding an open position your account is either credited, or debited, interest on the full size of your outstanding position.

Whether you’re credited or debited depends on whether you’re holding a long or short position. It also depends on the interest rate difference between the two currencies in the pair you’re trading.

We will use GBP/JPY as an example. The primary interest rates in Britain are much higher than in Japan. As I explained above, whenever you open a long you simultaneously buy the base currency (GBP) and sell the quote currency (JPY). So if you go long GBP/JPY you will earn interest at 5 pm EST. It is simply a case of deducting the interest rate of the quote currency from that of the base currency. So if Brittan has its interest rates at 3% and Japan has its rates at 0.5% when you go long GBP/JPY you will be paid 2.5% (3% – 0.5%) interest, on roll over.

Again, we will use GBP/JPY as an example. If you’re short you are simultaneously selling the base currency and buying the quote currency. The interest rates are still the same as the example above so all you do is deduct Britains rate from Japans (0.5% – 3% = -2.5%). So when the position is rolled over you will lose 2.5% of that position on rollover.

If you want to avoid rollover fees simply ask your broker when they rollover positions and make sure you have no positions open at that time.