What is Forex?

 

Video Transcription:

Hey traders! Welcome to the Forex Beginners Course. This is Cory
Mitchell, Video 1. We are looking at what is the forex market. We’re just
going to look at some basics of what it actually entails brought to you by
Investoo.com.

So forex is the simultaneous buying of one currency and the selling of
another. This is why currencies are always listed in pairs. So you have
the Euro/USD. For example, the USD/JPY and it’s always a simultaneous
buying and selling because you can think of it if you’re going to the bank.
Say you’re in the U.S. So you have U.S. dollars and you’re going on a
trip to Europe. You’re going to need to exchange your U.S. dollars for
Euros.

So you’re selling one. You’re selling your U.S. dollars to buy Euros. So
there’s always going to be two transactions that occur simultaneously.
You’re getting rid of one to get the other which means there’s always those
two transactions going on and you can never be totally out of a currency.

By that I simply mean you’re going to have to exchange at some point one
currency for another. You either have Euros or you have U.S. dollars but
you’re going to have either one of them and especially when we’re trading
at forex we’re looking to profit off of fluctuations in currency rates.

So we’re always going to have one of those positions. So we’re either
going to want to have Euros and then we’re going to have to get rid of them
to get U.S. dollars or we’re going to have U.S. dollars and we’re going to
want to swap them for Euros.

So each currency has an abbreviation. The Euro is EUR. The USD is U.S.
Dollar. JPY Japanese Yen, AUD is Australian Dollar, NZD New Zealand
Dollar, GBP British Pound. CAD is the Canadian Dollar and CHF is the Swiss
Franc. These are the main currencies that you’re going to be using and we
can create pairs by mix matching all these that we have listed here.

So you have the CAD/Swiss, the NZ/JPY, the Euro/JPY, AUD/NZD, all sorts of
combinations and these are going to be the main currencies that most
traders are going to focus on. If you buy the Euro/USD, you are buying the
Euro and selling the U.S. dollar. You are therefore expecting the Euro to
rise relative to the U.S. dollar. If you sell the Euro/USD, you’re selling
the Euro and buying the USD. You are therefore expecting the Euro to fall
relative to the U.S. dollar.

So if you look at this case. This would be the example of you are taking
your U.S. dollars to a bank to exchange them for Euros. If while you are
holding those Euros it goes up in value you are going to make a little bit
of money when you go back to the bank later and exchange those Euros for
U.S. dollars and that’s basically what we’re doing in the forex market is
all we’re doing is converting one currency to another if we believe that
it’s going to appreciate relative to that currency.

So in this case if we buy the Euro, we want it to go up so that when we
exchange it back we can make a profit. So the price of a currency is
affected by how global factors such as the balance of payments, which is
the difference between imports and exports within a country; demand for
currency via international trade, so how much money is needed to buy
international goods; the inflation and interest trade outlook for each
country as well as traders simply buying and selling based on these and
other factors. So these are all going to affect how the price of a
currency pair is determined.

So for inflation and interest rates, the higher the interest rate is
generally the more attractive it is to international investors, which is
then going to create a demand for this currency. So if you have a low
interest rate in the U.S. and you have a high interest rate in Australia,
Australia becomes more attractive to investors in the U.S. because they can
get a higher interest rate there.

So they may sell some of their U.S. dollars to buy Australian dollars,
place some of those in an Australian bank or simply in the forex market, we
just buy the Australian dollar and we can benefit from that higher interest
rate. So these all affect how attractive a currency is relative to other
currencies which therefore affects its price.

Also simply traders, me I’m sitting at home trading. You’re sitting at
home trading or will eventually be and lots of other traders and banks are
also buying and selling currencies constantly. It’s a very speculative
market.

So all our actions help determine what the price is going to be. So if I
think the price is going to go up, I’m going to put out orders to buy
certain currencies and that’s going to help push the price up along with
all the other traders who are doing the same thing. So I base my trades
off technical analysis and a lot of other traders do as well so that’s
going to have a small impact on the price of the currency as well.

So most currencies are priced to five pips. The Euro/USD for example, will
be priced at a number looking like this. So it will fluctuate all the time
but currently it could be trading at 1.36451. So these are five decimal
places.

The fourth decimal place is what we call one pip movement. So if this goes
from 45 to 46 or down to 44 that would be a one pip movement. This fifth
decimal place is what we call a fractional pip and that is simply one-tenth
of a pip.

So up until a few years ago, we didn’t have fractional pip pricing. All we
had was four decimal places but now with brokers becoming more competitive,
more volume in the forex markets, online brokers, advances in technologies,
all these things, we now have that fifth decimal place which just makes
pricing that much more accurate.

So what does that actually mean? For the cost it means you are paying
1.36451 U.S. dollars for each one Euro. So you can always think of the
front currency in a pair as one. So in this case, it’s Euro and the price
of the currency is how much it costs of the second currency to buy the
first.

So let’s look at the JPY. For example, the USD/JPY might be priced at
102.564. So that means it costs 102.564 JPY or yen to buy one U.S. dollar.
So 102 of these plus the decimal point to buy one U.S. dollar. JPY pairs
are priced to three pips.

So in this, case we have the second decimal is what we call a pip and the
third is the fractional pip. So if this number goes from 102.56 to 55 or
to 57 that would be a one pip movement. You will see this third number
also move and that’s simply the fractional pip. So that’s one-tenth of a
pip. So this whole number will fluctuate all the time and this will go up
and down and then when you have a full pip movement, this one will move.

So we trade forex in three position sizes. Micro lots which are equivalent
to about a $1000, Mini lots which are equivalent to $10,000 and Standard
lots which are $100,000. So you can take varying position sizes based on
these lot sizes.

For example, you can take five Micro lots which would be $5000. You could
take seven Mini lots which would be 70,000 dollars. You could take three
Standard lots which would be $300,000. So we can take any position size we
want as long as they are increments of these values.

So in the stock market, we’re buying stocks. If you buy 100 shares of a
company you can you know buy 500 shares or 1000 shares but you’re measuring
it in shares in the stock market. In the forex market, we’re dealing in
money. So how we buy money is simply in lots of money. So that is why we
use these what we call lot sizes and they’re simply the volume of money.
So if you buy five Micro lots that means you’ve bought 5000 dollars’ worth
of a currency.

Each pip movement is worth 10 cents for a Micro lot, a dollar for a Mini
lot and 10 dollars for a Standard lot. So if this price goes from 102 or
let’s use the Euro/USD. If this price goes from 1.3645 to 36461 that means
it’s moved up one pip. So depending on which side of the trade you’re on,
you’re either going to make or lose 10 cents if you have a Micro lot
position. You’re going to make or lose a dollar if you have a Mini lot
position or you’re going to make or lose 10 dollars if you have a Standard
lot position.

So that goes for pairs where the USD is the second listed in the pair. If
it’s not the second listed, then you’ll get slightly different pip values.
So this is kind of standardized for when the U.S. is the second pair listed
but we will have other pairs. As we get into trade examples, we’ll look at
that and ways to quickly determine what we call the pip value for currency
pairs where the USD isn’t listed second.

So we’re going to review. That’s it for today. Currencies always trade in
pairs. We can trade in Mini lots, Micro lots, Standard lots. So a Micro
is $1000, Mini lot is $10,000, Standard lot is $100,000. One pip movement
for a Micro lot is 10 cents, a Mini lot is one dollar and a Standard lot is
10 dollars.

Prices where the USD isn’t the second currency will have slightly different
pip values and again we will look at some trade examples and stuff later on
in the course. We will go over exactly what those are.

So in the next video, we will highlight some spots where you can find free
forex charts and get yourself acquainted with the forex market and I’ll
also show you how to read those forex charts. Until next time, happy
trading.

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