The forex market is traded around the globe, virtually around the clock. Learn more about forex trading with this retail forex guide for beginners.
The foreign exchange market (forex) represents a way to exchange one nation’s currency for that of another. More than $6 trillion of currency changes hands every day, plus because exchange rates are based on nations’ interest rates, economics, plus geopolitical conditions, rates are always fluctuating. Forex represents a dynamic, international market.
While forex trading offers potential for profit, it’s also subject to unique risks plus not all accounts qualify to trade forex.
Forex trading venues
In general, retail clients have two choices for trading currencies:
The futures market. A futures contract is an agreement to buy or sell a predetermined amount of a commodity or financial instrument at a certain price on a stipulated date. Such contracts are traded on exchanges, plus volume is typically limited to the major currencies.
The forex market. Most foreign exchange trading takes place among institutional players—banks, dealers, plus large intermediaries—in what’s known as the interbank market. Retail forex brokers like Charles Schwab Futures plus Forex, use this knowledge to post competitive bids plus offers (called the bid/ask spread) against which retail traders may sell or buy currencies in specific increments.
To trade both futures plus forex, a trader needs to have a qualified account. It’s possible to apply to trade futures plus forex through a client’s Schwab.com account.
Understanding the quote
Trading the forex market involves trading two different currencies against each other. The ratio of the two is what’s known as a currency pair. The quote for a forex currency pair references what it costs to convert one currency into the other. For example, if the U.S. dollar (USD) plus Canadian dollar (CAD) pair is trading at 1.33, $1 USD is equal to $1.33 CAD. To find out how much it’d cost to buy a Canadian dollar, a trader would invert it: $1/1.33 = $0.7519. In this example, it costs a little more than $0.75 to buy a Canadian dollar.
Here are some common terms a trader needs to know before trading forex:
Pip. A pip is the minimum price fluctuation in a currency pair. For most pairs the pip is 0.0001, except for pairs that involve the Japanese yen (JPY). For JPY pairs, the pip is 0.01. For example, a trader might see a quote in the British pound (GBP) plus USD (GBP/USD) pair of 1.4278. This means a pound costs $1.4278.
Pip value. The value of a pip is determined by the size of the trade. Futures contracts are standardized, plus their minimum fluctuation is called a tick. Currency futures have different contract sizes, but usually the size is 100,000 or 125,000. However, GBP/USD futures are 62,500, so the tick value is $6.25 (62,500 x 0.0001 = $6.25). If a trader bought one contract of GBP/USD 1.4343 plus sold it at 1.4347, they’d have made 4 x $6.25 = $25, In contrast, trading forex allows for more flexibility. Retail traders can trade in increments as low as 10,000 units, much smaller than a futures contract. When trading on the forex market, a trader might buy 20,000 units of EUR/USD. Each pip would be worth $2 (20,000 x 0.0001 = $2). If a trader bought 20,000 units at 1.2320 plus sold them at 1.2312, an 8-pip loss, they’d have lost $16.
Majors plus exotics. Any pair consisting of the following actively traded currencies is known as a major: U.S. dollar (USD), Japanese yen (JPY), euro (EUR), Australian dollar (AUD), Canadian dollar (CAD), British pound (GBP), Swiss franc (CHF), plus New Zealand dollar (NZD). All currencies plus pairs that involve them are known as exotics.
Forex spreads. On retail forex brokerages, trade costs are typically paid through the bid/ask spread. Also, bid/ask spreads aren’t guaranteed. Major pairs typically have tight spreads throughout the day plus night, but exotics generally have less liquidity plus wider spreads. It’s important to understand liquidity risks before trading forex.