Forex trading

Forex trading works by simultaneously buying one currency while selling another. If the currency you have bought increases in value against the currency you have sold, you can close your position for a profit. If not, you make a loss.

Forex markets are always quoted in pairs – EUR/USD, for example – because you’ll always be trading one currency for another. The exchange rate is how much one unit of the first (‘base’) currency costs in the second (‘quote’) currency

Say the EUR/USD exchange rate is quoted as 1.1700. This means that it would cost 1.17 dollars to buy a single euro.

Pips are a forex-specific synonym for basis points or ‘points’ - the smallest amounts by which a market price can change. For major currencies a pip is a standardized unit of 1/100th of 1%, or 0.0001, except for pairs including the Japanese yen. For these pairs, a pip is equal to 0.01.

At IG, we tend to use the term ‘pips’, but you may see ‘points’ used interchangeably by other brokers.

Major currency pairs are those that trade in the highest volume on a daily basis. These pairs tend to be incredibly liquid and trade 24 hours a day, usually with very narrow spreads. Some examples include EUR/USD, USD/JPY, GBP/USD and USD/CHF.

What constitutes a minor currency pair can vary depending on where you look. Some brokers stipulate that a minor pair can’t include the US dollar, for example, and as such refer to them as ‘crosses’.

More generally, a minor pair is any currency pair that’s traded less frequently than the majors, even if one or both constituent pairs also appear in a major currency pair. Some of the more popular include CHF/JPY, GBP/CAD and EUR/SGD.

Exotic currency pairs, or ‘exotics’ for short, are made up of one major currency along with another from a small or emerging economy. Examples include GBP/MXN (sterling and the Mexican peso) or USD/PLN (the US dollar and the Polish zloty).