In this latest section of our How to Trade Forex course we're gonna start
looking at currency pairs. What they actually are and how traders try and
profit. Hello I'm David Jones from capital.com and this is the next step
in our complete course on how to trade Forex.
So we now, today, are going to look at some of the.. some of the basics, some of the real
basics. What is a foreign exchange pair? What does it mean? What are the price
movements? How do we talk about price movements and at a really basic level:
how do traders try and profit. So now we're just really setting the scene for
what the foreign exchange markets are all about. So let's get started.
Let's take a look at what some typical currency quotes look like so we've got
four here. Pound US dollar - 1.3200. Euro US dollar 1.1400
Euro pound, euro sterling - 0.8800.
And dollar Japanese yen 110.00. What does this actually mean?
Let's go back to pound US dollar. So 1.32 - this means that one
pound would buy 1.32 US dollars. And of course we can work our
way down at the time of recording, EURUSD was 1.14. One euro would buy a
dollar and fourteen cents. Euro sterling: so the euro was worth 0.88 of one pound.
So eighty eight pence. And finally this one here - dollar Japanese yen 110. One dollar
would buy a hundred and ten Japanese yen. And of course these.. these rates will
fluctuate throughout the trading day and currencies are a 24 hour market.
Let's take a look at price changes. So if you've heard price changes talked about
in currency markets, you've probably heard "the market moved 100 points" or
"100 pips". So they're pretty interchangeable, this terminology.
Let's walk through and see what we mean so. Let's take pound US dollar. Starts the day
at 1.32. So one point three two zero zero is how it's usually quoted.
So a pound is worth a dollar and 32 cents. By the end of the day the
exchange rate has traded up to 1.3300. So now a pound is
worth a dollar and 33 cents. So the exchange rate change is a rise of 0.01.
And I've got that number
clearly by taking away where it ended today - 1.33, taking away
from where it started the day 1.32. So we've seen a change of 0.0100
But in forex terminology that's a hundred point move ,okay. So it is
of course a 0.0100 move, but when we're talking about foreign
exchange, we look at how many decimal places it's quoted to. The pound US dollar
is quoted to four decimal places traditionally. So this move here is a
hundred point move. Let's take a look at one more. Dollar yen (USDJPY) starts the day at 110.
So one dollar buys you 110 Japanese yen.
Finishes the day at 109.50. So the dollar has dropped against the yen.
The change in this example from 110 to 109.50 is 0.50. But again in
currency trading terminology we call that a 50 point or 50 pip move because
dollar yen (USDJPY) is quoted to two decimal places.
0.50 is referred to as a fifty point move. And let's take a look
how the traders profit from this. Well if our trader buys ten thousand pounds when
GBPUSD is 1.32, a trader is speculating that the pound will go up.
But at the same time the dollar will fall against the pound. So when we're
buying, it's the first quoted currency we're speculating is going to rise.
If we're buying pound u.s. dollar (GBPUSD), we think the pound is going to rise and the US
dollar is gonna fall. So if the trade ends up being closed
above 1.32 - there's gonna be a profit. Because we bought at 1.32. If we close
this trade GBPUSD below 1.32 - there will be a loss. Margin trading
using leverage means the trader only has to initially deposit - for this example of
10,000 pounds - GBPUSD, around 333 pounds to open this trades. But this
makes a lot more sense if I show you on the platform, so let's jump on the
trading platform. So here's the trading platform at capital.com. I've set up an
order ticket here, just to walk through the numbers we just looked at.
So in terms of size 10,000 pounds (that's the size of this trade I'm setting up), so to
do that trade, the margin required is 334 pounds. So I could have a 10,000 pound
position and only tie up 334 pounds. In this example we will talk about margin
and leverage (and) the risks and the rewards in a later video in this course.
So what I've put in here, buy when the price is 1.32 and then, just to scroll down,
close when the price hits 1.33. So you can see it shows my profit if I bought at 1.32
10,000 pound US dollar (GBPUSD) and closed when the price is at 1.33. In this example a
hundred point move in my favour for 10,000 GBPUSD would deliver a profit of
76 pounds. So you can see it down there. And of course the other way of looking
at it - if I bought at 1.32 and came out a hundred points lower - then I'd lose 76 pounds.
Okay, so it gives us an idea of our potential risk and our reward and
for this trade we tie up 334 pounds to control that 10,000 pound position.
So that's how currency traders will try and profit
from the moves and how you can in the various markets that we're going to look
at during this course. So we've looked at how foreign exchange pairs are made up
and how we classify the movements and how traders will try and profit. You know
it is possible to have significant profits during the day and of course the
risk of significant losses because of this leverage factor - trading on
margin. We will talk about that in a few episodes time. The risks and the rewards
and how to manage it. Next time around we're going to take a look at the events
that actually move foreign exchange markets, whether it's news, news
announcements, government numbers, market sentiment surprises. All of this sort of stuff.
So we look at what we need to be watching when we're trading foreign exchange.
We'll start wrapping up this lesson just here but first of all
before we finish off don't forget to never miss out on any of the content
when we load up new lessons just make sure you are subscribed by clicking on
the subscribe button and the alarm bell notification thing. If you click on that
you get a push off YouTube whenever we've put up new content. To follow along
when I'm using the trading platform, we're going to be using the trading
platform a whole lot more when we start looking at technical analysis and
trading techniques. So if you don't have an account with us you can open an
account by either going to capital.com and opening an account online or if you
download the capital.com app from wherever you get your apps from. You can
open an account through that but for this next step into the world of trading
Forex we'll wrap things up there. So until next time from me David Jones and
capital.com - good luck with your trading!