What is Forex?

Currency Trading

The global foreign exchange market is the largest and most liquid financial markets in the world. One of the contributing factors to this is significant advancements in technology which have made the forex market easily accessible for individual traders. As a result, traders in Canada can use online trading platforms such as MetaTrader 4, MetaTrader 5, and Iress to access global markets 24 hours a day.

A substantial amount of forex trading is conducted on the major currency pairs. The 'majors' include the US dollar (USD) as either the base currency and traded against the Euro (EUR), British Pound (GBP), Yen (JPY) and Swiss Francs (CHF). Other currencies with large trading volume include the Australian dollar (AUD), New Zealand dollar (NZD) and Canadian dollar (CAD). All three are considered to be commodity currencies which means that their value is closely correlated to commodity price movements.

The major currency pairs are:

EUR/USD (Euro/US Dollar)

GBP/USD (British Pound/US Dollar)

USD/JPY (US Dollar/Japanese Yen)

USD/CHF (US Dollar/Swiss Franc)

Some of major benefits of trading forex with FP Markets include real-time pricing, competitive spreads and deep liquidity courtesy of our relationships with top-tier liquidity providers. Our mission is to provide Canadian traders with a seamless forex trading experience which. This includes leveraged CFD trading in Shares, Metals, Commodities, stock market Indices and major Cryptocurrencies such as Bitcoin.

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Currency Trading with a Canadian Forex Broker

5 reasons why FP Markets have
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Global Regulation – Regulation is a major factor in deciding on a broker, especially for retail traders. The FX market is considered to be high risk making it essential to trade with a regulated forex broker. FP Markets must adhere to stringent regulation which ensures segregated client funds and competitive pricing.


Tighter Spreads Faster Execution – Consistently Tighter Spreads from 0.0 pips on major forex pairs such as EUR/JPY, ultra-fast execution, top-tier liquidity and market leading pricing, 24/5.


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Open a Demo Account or Live Account with FP Markets today for access to the foreign currency market. Demo accounts are a great way to learn about forex and CFD Trading. They allow traders to learn about trading fundamentals and develop a trading plan without having to make a capital investment. All of our trading platforms include features such as advanced charting tools which can be used to conduct fundamental and technical analysis. Open a trading account with a regulated forex broker today.

What is Forex Trading?

Forex trading is buying one currency and selling another simultaneously. When looking at currency pairs such as the GBP/USD, the first currency (GBP) is the base currency while the second currency (USD) is the quote currency. Traders conduct market analysis to predict the potential price movement and identify trading opportunities. Fundamental Analysis and Technical Analysis are the most common methods with the latter involving the study of past market data - primarily price and volume. There are no central banks for forex trading with transactions taking place electronically or online. One of the main attractions of forex is that it trades 24 hours a day, 5 days a week. This gives professional and retail traders time to analyse data and make informed decisions. Successful traders in Canada and abroad use trading strategies and a trading plan to determine their entry and exit points. Moreover, they incorporate risk management techniques such as stop-loss and take-profit.

There are 4 major trading sessions.

Keep in mind that some countries including Canada, Australia, the US and UK, shift to/from daylight savings time in October/November and March/April. Market liquidity for currency pairs depends on the forex trading sessions. For instance, the CAD/USD pair shows a lot of movement and liquidity during the New York session and when major market announcements are made. In contrast, the AUD/USD pair shows maximum movement in the Tokyo and London sessions. Once you know when to trade, the next step is to learn about the history of forex and commonly used terms.

A Brief History of Forex

The exchange of currencies dates back to 600BC when the first official currency was created. Fast forward to today and the forex market has become the largest financial market in the world. The timeline below highlights key moments in the journey of forex.

600

BC

Kingdom of Lydia introduces
coins made of gold and silver.

618

AD

Tang dynasty in China created
the paper note.

1661

AD

The first banknote ever printed
in Europe is produced in
Sweden.

17th

CENTURY

Amsterdam becomes home to
the first forex market ever
created.

1819

AD

England adopts the gold
standard with the government
guaranteeing to redeem any
amount of paper money for its
value in gold. The United States
followed suit in 1834 before
other major countries (France,
Germany and others) in 1870.

1946

AD

Following multiple World Wars,
the gold standard system
breaks down. It is replaced by
the Bretton Woods System.
The US Dollar is established as
the world’s reserve currency.

1973

AD

Official switch to the free
floating system.

1996

AD

Birth of online brokers.

2005

AD

MetaTrader 4, a revolutionary
trading platform is released. It
is specifically designed for forex
traders and features real-time
pricing.

Today

Daily forex turnover figures
exceed more than $5 trillion per day.

How Do Forex Markets Work?

Forex is the most popular over-the-counter (OTC) market. In forex, currencies are bought and sold through a network of banks. As there is no exchange, forex trading is decentralised and trading can take place 24 hours per day. There are 4 main trading sessions, namely Sydney, London, New York and Tokyo.

The most popular forex market type is the spot forex market. In forex, spot trades involve the exchange of currency pairs electronically using online trading platforms such as MetaTrader 4 and MetaTrader 5. Other market types include the forward forex market and futures forex market.

What is a Base and Quote Currency?

Currencies are denoted in 3lettered ISO codes. Examples of how major currencies are denoted are USD (US dollar), AUD (Australian dollar), EUR (Euro), JPY (yen) and CAD (Canadian dollar).

In foreign currency trading, currencies are quoted in pairs. When you see a currency pair, the first currency is called the base currency and the second currency is the quote currency or counter currency. For instance, say the EUR/AUD is trading at 1.6163. This means to buy 1 unit of Euro, you will need $1.6163 Australian dollars.

What Moves
the Forex Market?

There are a number of factors that have an impact on the forex market. They can split
into two categories; market participants and macroeconomic factors.

Market Participants

Super Banks: As it is decentralised, it is the world's largest banks that determine the exchange rate. Global banks such as Barclays, HSBC, Citi, JPMorgan, Toronto-Dominion Bank and Deutsche Bank are among the biggest traders of forex.

International Companies: Large global corporations are involved in the foreign exchange market for the purpose of doing business. If an Canadian-based company is selling products in the United Kingdom they will have to trade GBP to CAD in order to return their income back home.

Retail Traders: Refers to individuals who trade their own money in order to make a profit. Easier access to the forex market through online brokers and advanced trading platforms has resulted in retail traders accounting for a growing proportion of the forex market. This had created additional liquidity in the forex market.

Economic & Macroeconomic Factors

Central Banks: Macroeconomic statistics such as inflation have a significant impact on forex markets. Governments and central banks such as the Federal Reserve meet on a regular basis to evaluate the status of their respective economies, set interest rates and monetary policy - all of which have a direct impact on forex markets. FP Markets Economic Calendar makes it easy to stay up to date with the release of critical economic data and information.

Capital Markets: The prices of stock, bond and commodity futures also have an influence on foreign exchange markets. Like forex, they have extended trading hours when compared to stock exchanges such as Canada's TSX.

International Trade: Figures relating to the trade numbers of a country have an impact on the value of currency. Trade deficits and surpluses will be reflected by price movements in the forex market.

Politics: This is particularly the case around key political events such as elections and results in high levels of volatility in the forex market. This is evident by historical events such as US elections, and even more so when there is a change of government.

How does Forex Trading work?

Forex trading involves simultaneously buying and selling two currencies. For example, if you are buying the EUR/CAD, it means you’re buying EUR by selling CAD and if you’re selling the pair, you’re buying CAD by selling EUR.

Advancements in technology have made it possible for investors to access the foreign exchange market via online brokers. This is done using forex trading platforms such as MetaTrader 4, MetaTrader 5 and Iress. Read more on How Do I Trade Forex?

The rise in online trading has paved the way for using CFD trading. These are leveraged products which allow traders to open a position with an initial investment that is only a fraction of the value of the full trade.

An Example of
Leverage CFD Trading

Suppose you want to trade CFDs, where the underlying asset is the AUD/USD currency pair, also known as the “Aussie.” Let us suppose that the AUD/USD pair is trading at:

Bid/Ask Spread

Hedging is a popular risk management strategy that CFDs are often used for. Using CFDs and the concept of leverage, Canadian traders can hedge their portfolio against short-term market volatility within an existing position. Depending on the value of a trader's existing position and the asset they are hedging against, they may be able to hedge against a large position with only a fraction of its value.

You decide to buy AUD 20,000 worth of USD because you think that the AUD/USD price will rise in the future. Your account leverage is set to 100:1. This means that you need to deposit 1% of the total position value into your margin account.

Now, in the next hour, if the price moves to 0.6880/0.6882, you have a winning trade. You could close your position by selling at the current price of USD 0.6880.

In this case, the price moved in your favour. But, had the price declined instead, moving against your prediction, you could have made a loss. If that loss resulted in your account equity falling below your margin requirements, your broker may issue a margin call.

This small difference is known as “pip” or “percentage in point.” For Indices, 1 pip is equal to a price increment of 1.0 which is also called an Index point. In the forex market, like in the above example, it is used to denote the smallest price increment in the price of a currency. For assets like the AUD/USD, which include the US Dollar, a pip is represented up to the 4th decimal place. But, in case of pairs that include the Japanese Yen, like the AUD/JPY, the quote is usually up to 3 decimal places.

If the price
of AUD/USD
To You Could Gain or Lose
(for a long position)
Resulting in a Return
of the Initial Margin
Rises by 10% 0.75603/0.75606 0.75603/0.75606 1000%
Rises by 5% 0.72167/ 0.72169 USD 687.4 500%
Declines by 10% 0.61857/0.61859 USD -1374.6 -500%
Declines by 5% 0.65293/0.65297 USD -687.4 -1000%

Forex Quotes/ Exchange Rates

Currencies are traded in pairs, like the Euro/US Dollar (EUR/USD) or Australian Dollar/US Dollar (AUD/USD). Currencies are denoted in 3-lettered ISO codes, such as EUR (Euro), GBP (Great British Pound) and USD (US Dollar). When you see a currency quote, the first currency is called the base currency and the second currency is the quote currency or counter currency. For instance, say the EUR/USD is trading at 1.1086. This means to buy 1 unit of Euro, you will need $1.1086. USD

The higher price $1.1087 is the ask rate, while $1.1086 is the bid rate. The bid price is the maximum price a buyer is willing to pay for the currency. Ask price is the minimum price a seller is willing to accept for the same currency. These rates fluctuate constantly, depending on supply and demand, market sentiment and external events.

Spread

The difference between these two rates is known as the spread. This includes the broker’s charges. The spread depends on your choice of currency pair and the forex broker. Licensed forex brokers who provide ECN (Electronic Communications Network) pricing can source price quotes from multiple liquidity providers in the market. This means they can offer the tightest spreads.

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Pip

Pip is an acronym for Point in Percentage. It represents the smallest amount of change in the rate of a currency pair and is a standardised unit. For a US Dollar based currency pair, like the AUD/USD, one pip is $0.0001. However, for some currencies, like the Japanese Yen (JPY), it is denoted as $0.001.

Pip value fluctuations have an effect on trading gains. For example, if you decide to buy €10,000 and the EUR/USD pair is trading at 1.1086, the price you will have to pay will be $(10,000x1.1086) or $11,086.

If the exchange rate for this pair sees a 5-pip increase, which means the EUR/USD is now trading at 1.1091, then to buy €10,000, you will have to pay $11,091.

Majors, Minors and Exotics

Not all currency pairs are traded in large volumes. The US Dollar, being the world’s reserve currency, is definitely traded the most; although, over the years, its dominance has waned somewhat. Based on how frequently they are traded, currency pairs are segregated into major, minor and exotic categories

Majors

Major currency pairs have the tightest spreads.

They are:

EUR/USD

Euro/US Dollar (aka Fiber)

GBP/USD

British Pound/US Dollar (aka Cable)

USD/JPY

US Dollar/Japanese Yen (aka Ninja)

USD/CHF

US Dollar/Swiss Franc (aka Swissy)

CAD/USD

Canadian Dollar/US Dollar (aka Loonie)

AUD/USD

Australian Dollar/US Dollar (aka Aussie)

NZD/USD

New Zealand Dollar/US Dollar (aka Kiwi)

Minors

Then comes a category of minor currency pairs, otherwise known as cross-currency pairs. They are called so because they do not include the US Dollar. So, to convert one into the other, the US Dollar will need to act as a mediating currency.

A few of the minor pairs are:

EUR/GBP

Euro/British Pound (aka Chunnel)

EUR/AUD

Euro/Australian Dollar

CHF/JPY

Swiss Franc/Japanese Yen

GBP/JPY

British Pound/Japanese Yen (aka Gopher)

GBP/CAD

British Pound/Canadian Dollar.

Exotics

Exotics can include a major currency with an emerging market currency. Trading in exotics is considered risky, since they tend to have low liquidity, wider spreads and political instabilities in these countries can make these currencies volatile.

Some examples are:

CAD/TRY

Euro/Turkish Lira

USD/HKD

US Dollar/Hong Kong Dollar

AUD/MXN

Australian Dollar/Mexican Peso

In the brackets are the common nicknames for these currency pairs.

Going Long or Going Short

A unique feature of forex and CFD trading is the ability to go long and short. When you assume a long position in a currency pair, you buy a currency in the hope that its price will rise (appreciate). This involved buying the base currency and selling the quote currency as you expect the base currency to appreciate with respect to the quote currency.

When you assume a short position, you sell the base currency, with the expectation that it will depreciate (decline in price), allowing you to buy it at a later date, but at a lower price.

Lot Sizes

When you decide on your position size, a term you will hear is “lot.” Lots are standardised position sizes for currencies. The forex market gives you the flexibility to trade according to your means and risk profile. The standard size for a lot is 100,000 units of the base currency. There also are mini and micro lot sizes that contain 10,000 and 1,000 units of the base currency, respectively. These key terms and others are covered in detail in our Beginner's Guide to Forex Trading.

What is Liquidity in Forex Trading?

Liquidity in forex refers to the activity levels of the market. When you trade in major currency pairs, there are a lot of buyers and sellers which translates to high levels of liquidity and lower Forex Spreads. This means that there is always likely to be an opposite player for every position you take. You can buy or sell large amounts of these currencies without causing any significant difference to the exchange rate.

Liquidity fluctuates during trading sessions. You are likely to see significant activity during the overlapping of the New York and London sessions. Depending on your style of trading, you could benefit from choosing specific trading sessions. For instance, short term traders prefer the US or London sessions as large price breakouts and percentile movements are more likely to occur. The Tokyo session is often range-bound, which might not be the best for them.

The Concept of Leverage in Forex Trading

Leverage in forex trading is a useful financial tool. It allows traders to gain greater exposure to market movements than they could otherwise afford. This means a trader in Canada can enter a position worth $100,000 with just $1,000 in their trading account, with a 100:1 leverage ratio.

The leverage amount is provided by the forex broker. Consider it as a loan, which can help you to increase your gains with little price increments. However, also remember that leverage magnifies your losses too, if prices move in the wrong direction. This is why it is important to put in place robust Risk Management Strategies while trading.

When you decide to trade, you need to open a margin account with a regulated broker such as FP Markets. Here, you will need to deposit an initial margin amount that is required to keep your leveraged positions running.

This is also called deposit margin. When the amount drops below the minimum level, you will be issued with a margin call. This means that you need to deposit funds to keep your positions open.

A 50:1 leverage ratio means a minimum margin requirement of 1/50 or 2% of the total trade value from you. Similarly, a 100:1 leverage ratio means that you need to deposit at least 1% of the total value of your trade in your margin account.

Technical

Fundamental Analysis

Using guesswork to predict the direction of price movement is not the best idea. Experienced traders carefully conduct market analysis, in order to determine the direction in which currency rates are likely to move. Two major approaches are used here: fundamental analysis and technical analysis. For more in-depth fundamental and technical analysis plus trading education, please visit our Traders Hub blog.

Fundamental Analysis

Currency prices fluctuate according to the perceived economic health of a nation. Fundamental analysis is the study of all factors that impact a country’s economy which may in turn be representative of its future trends. When investors perceive a particular economy as being more rewarding than others, demand for the domestic currency increases, consequently driving up its price. Fundamental traders look out for a number of economic indicators including:

Monetary Policy: The interest rates decided by central banks directly impact the domestic currency. When the interest rate increases, currency value tends to appreciate and vice versa.

Inflation Rate: Central banks are responsible for keeping inflation in check and promoting employment. To do so, they have various tools available, including monetary policy, market interventions and quantitative easing.

Balance of Trade: The balance between a country’s exports and imports can impact currency values.

GDP Growth: The overall health of an economy is denoted by its gross domestic product (GDP) growth. Currency values tend to appreciate with a favourable GDP growth rate.

Other economic indicators that impact the forex market are employment rate, retail sales, manufacturing index and housing market data. To keep track of the economic releases, traders use the Economic Calendar. There tends to be a significant increase in volatility levels associated with the release of important reports. Based on whether the actual figures meet or beat market consensus, price movements in currency will occur.

Technical Analysis

Technical analysis is based on the principle that the markets tend to repeat their historical price trends. To discover these trends, traders rely on technical indicators and forex chart analysis. Technical indicators are actually statistical formulae that can provide important information about the market. They are categorised into:

Trend: Such as Simple Average, Trend lines, Moving Average Convergence Divergence (MACD)

Volume: Such as On Balance Volume (OBV), Chaikin Money Flow

Momentum: Such as Stochastic Oscillators, Relative Strength Index (RSI)

Volatility: Such as Average True Range (ATR), Volatility Index (VIX)

Forex trading platforms like MetaTrader 4 and MetaTrader 5 come with pre-installed technical indicators, allowing you to analyse the ongoing trends and any chances of price reversals. Based on these indicators, you can create forex trading strategies.

These platforms also allow you to use a combination of both fundamental and technical analysis. In relation to fundamental analysis they provide real-time financial news alerts which allow traders to gauge key factors. They can analyse the interest rate and inflation outlook for both currencies in a pair while technical indicators and charts provide insight into trends and ranges within the price history. Chart patterns can provide clues regarding how prices might move within the patterns and where they are likely to go after a break-out.

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How to Trade Forex

Take a look at these 5 steps to start trading Forex:

Step 1 | Educate yourself

Learn all you can about the market. Understand how forex trading can benefit you and ascertain what time you can dedicate to it. Learn how to decipher market fundamentals and how to study charts. A wide range of education material is available on our Traders Hub Blog.

Step 2 | Find a Regulated Broker

A regulated or licensed broker will provide a certain level of protection and provide you the necessary tools to trade efficiently. Open an FP Markets Demo Account and access our educational materials and you can practice strategies in live market pricing, without risking capital.

Step 3 | Open a Margin Account

Decide on your risk/reward profile. How much of your capital can you afford to lose while trading? Based on that, choose your leverage. When you are a beginner, it is a good idea to start low. Once you have established a trading plan and appropriate strategies, it is time to open a Live Trading Account and choose from our wide variety of Funding Options.

Step 4 | Choose Your Trading Platform

Technology is key to the success of online forex and CFD trading. FP Markets provides optimal trading conditions with fast trade execution, minimum slippage, fund security and efficient technical analysis. Our trading platform options include MetaTrader 4 and MetaTrader 5 which are technologically advanced and feature packed. There are also specific versions to cater for use on Mac, iOS and Android devices.

Forex Trading - FAQ

The main difference between the two is that Forex is limited to currencies while Contracts for Difference (CFDs) cover a broader range of asset classes. This includes Shares, Indices, Commodities and Cryptocurrencies.

Find out more about the Similarities and Differences Between Forex and CFDs.

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