Forex Cross rates

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The foreign exchange (also known as FX or forex) market is a global marketplace

 for exchanging (buying and selling) national currencies against one another.

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It's the most heavily traded market in the world and tends to be the largest and most liquid asset markets in the world.

Currencies trade against each other as exchange rate pairs. For example, EUR/USD, GBP/USD and USD/JPY just to name a few.

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The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers

It's important to learn about currency pairs and what they mean.

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Basic example

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An American tourist in France can't pay in US dollars to see the show because it's not the locally accepted currency.

As such, the tourist has to exchange the US dollars for the local currency, in this case Euros, at the current exchange rate.

When you exchange U.S. dollars for euros, there are two currencies involved, so the exchange always shows the value of one currency relative to the other.

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The EUR/USD price, for example, lets you know how many U.S. dollars (USD) it takes to buy one euro (EUR).

The price of the EUR/USD currency pair is 1.0935, this means that it costs 1.0935 U.S. dollars to buy one euro.

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Now let’s take a closer look at Market Pricing and what it means

A pip – “percentage point” (the smallest price move) is the name used to indicate the fourth decimal place in a currency pair since most trade out to 4 decimal points .

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So, going back to our original example of the American tourist who had an original EUR/USD price of 1.0935 is now trading at 1.0985,

 that's a 50pip move; if you bought the pair at 1.0935 and sold it at 1.0985, you'd make a 50-pip profit.

 

The profit you made on the depends on how much of the currency you purchased.

Forex trading is done in the following lots:

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1,000 units is called a Micro lot each pip is worth $0.10

10,000 units is called a Mini lot each pip is worth $1.00

100,000 units is called a Standard lot each pip is worth $10.00

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The value of a pip can be calculated by dividing 1/10,000 or 0.0001 by the exchange rate.

Examples: EUR/USD AUD/USD   GBP/USD

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Now the pip value above holds true when you USD is listed second, pip values

will differ when USD is list first.

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If the USD isn't listed second: Like USD/CAD

• Divide the pip values above by the USD/CAD rate.

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Example USD/CAD rate is 1.2500

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For a Standard lot we would take USD$10/1.25 which would equal $8.00pip value

For a Mini lot we would take USD$1/1.25 which would equal $0.80pip value

For a Micro lot we would take USD$0.10/1.25 which would equal $0.08pip value

Pip Value For Other Currency Pairs

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You may have a USD account but want to trade the EUR/GBP.

We know from earlier that a standard lot for GBP is GBP10 so divide GBP10 by the USD/GBP rate. If the rate is 0.7100, then the pip value is USD$14.08.

 

Note: Japanese Yen (JPY) pairs are quoted with 2 decimal places, marking a notable exception.

For currency pairs such as the USD/JPY the value of a pip is 1/100 divided by the exchange rate.

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Fractional pip pricing comes in play when you see 5 decimal places which when you see the 5 equals the five-tenths of a pip

Calculating pip value on our previous example

Earlier had a 50pip gain on the EUR/USD trade 1.0935 sold at 1.0985

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1,000 units each pip equals $.10 x 50pips = $5.00

10,000 unit each pip equals $.10 x 50pips = $50.00

100,000 unit each pip equals $.10 x 50pips = $500.00

 

Market quotes:

EUR/USD = 1.0935 means it takes $1.0935 US dollars to buy one EURO or 1 Euro is worth 1.0935 US dollars.

USD/EUR = .9145 means that 1 USD equals .9145 EUR

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Bid and Ask

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Let’s look at the EUR/USD which has a market 1.09284/1.09421

Now you want to look at the price from the perspective of a broker.

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The 1.09284 represents the bid price – which is the price the broker is willing to purchase from you.

This is the price you SELL to the broker.

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The 1.09421 represents the ask price – which is the price the broker is willing to sell to you.

This is the price you BUY to the broker.

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The difference between the bid and the ask is the spread. The spread is the broker's commission on the trade.

So now that you have the basics of Forex trading the next best step is to see how the market is in real action by practicing / paper trading an account.

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Many online brokerages offer a free online practice account so you can see in action how price action in real time affects your trades. 

Also many accounts you can open for as little as $50.to $100.