All forex is quoted in terms of one currency versus another. Each currency pair has a ‘base’ currency and a ‘counter’ currency. The base currency is the currency on the left of the currency pair and the counter currency is on the right.
For example, in EUR/USD, EUR is the ‘base’ currency and USD the ‘counter’ currency. Forex price movements are triggered by currencies either appreciating in value (strengthening) or depreciating in value (weakening). If the price of EUR/USD for example was to fall, this would indicate that the counter currency (US dollars) was appreciating, whilst the base currency (Euros) was depreciating.
When trading forex prices, you would buy a currency pair if you believed that the base currency will strengthen against the counter currency. Alternatively, you would sell a currency pair if you believed that the base currency will weaken in value against the counter currency. Some examples of major currency pairs are:
- EUR/USD (The value of 1 EUR expressed in US dollars)
- USD/CHF (The value of 1 USD expressed in Swiss francs)
The difference in the BID/ASK of the currency pair is referred to as the ‘spread’. An example would be EUR/USD dealing at 1.4700/1.14703 (in this case the spread is 3 pips). The exceptions to this are the JPY pairs which are quoted to just 2 decimal places. A USD/JPY price of 96.41/96.44 displays a 3 pip spread.
Pips (Percentage in Points)
Pip stands for Percentage in Points. PIP is considered as the minimum price change in a currency pair. Most of our currency pairs are quoted to 5 decimal places with the change from the 4th decimal place (0.0001) in price commonly referred to as a ‘pip’. For example, if the price of the EUR/USD forex pair moved from 1.13700 to 1.13720, it is said to have climbed by 20 pips.
Foreign exchange is a leveraged (or margined) product, which means that you are only required to deposit a small percentage of the full value of your position to place a forex trade. This means that the potential for profit, or loss, from an initial capital outlay is significantly higher than in traditional trading. AXNFX provides a standard leverage of 1:400 for all the clients.