Currency pair and exchange rate

All currencies in foreign exchange transactions appear in pairs, with one currency corresponding to another. Their name consists of a three-letter abbreviation, also known as the ISO code, where the first two letters represent the country and the third letter is an abbreviation for the name of the currency.

Based on how often they are traded, currencies can be divided into three categories:

The most actively traded currencies are often referred to as major currencies, including the US dollar, euro, British pound, Japanese yen, Canadian dollar, Swiss franc, Australian dollar and New Zealand dollar. The main currency pairs include the US dollar with other currencies listed above such as euro against US dollar, US dollar against Japanese yen and US dollar against Swiss franc.

The cross currency pair includes two major currencies but neither will be US dollar. To give such examples, euro against pound, euro against Swiss franc, euro against yen, pound against Canadian dollar, pound against Australian dollar, and Swiss franc against yen.

Non-major currency pairs include one major currency and another currency that is traded in small amounts, such as euro against Turkish lira, dollar against Swedish kronor, dollar against Danish krone, dollar against Hong Kong dollar, and dollar against Sudanese pound. Non-major currency pairs usually have thin liquidity and large spreads.

Exchange rates always mean that the value of the base (first) currency is represented by the quoted (second) currency. In Forex, there are always two prices given: bid price and ask price. The former shows how much quote currency is needed to sell 1 unit of the base currency, and the latter represents how much quote currency is needed to buy the base currency. The selling price is higher than the buying price. The difference between two prices is called a spread and is usually measured in points.

Previously, only 4-digit precision measure was available. A tick, or percentage, was the smallest unit by which price fluctuations were measured. After introducing a more accurate 5-digit quotation, the smallest quote unit changed and is called a pip, but 1 tick was still calculated using the 4-digit measure.

For example, if the bid price is 1.11443 and the sell price is equal to 1.11449, the spread is 0.6 ticks or 6 pips.

Instructions

According to an instruction, there are two types of transactions:

  • • A ‘buy’ is created by the ask price and closed by the bid price.
  • • A ‘sell’ is created by the bid price and closed by the ask price.

Closing an order is the opposite of creating an order, which means that you sell a position you hold when you close a ‘buy’ order, and vice versa. When you close a ‘sell’ order, you buy the position you sold before.

A position can either be manually closed based on the current market interest rate or closed at a certain price level through stop-loss and take profit orders.

The purpose of stop-loss order is to limit losses. The stop loss price is higher than the open price in the sell order, and the stop loss price is lower than the open price in the buy order.

Take Profit allows you to close your position and secure a profit when you get a certain profit. The take-profit level limit in the sell order is lower than the current ask price, and the take-profit level limit in the buy order is higher than the existing bid price.

In order to make a profit, you need to close long positions when prices rise or short positions when prices fall.

Leverage, trading volume, required margin.

To create a position, you need a certain amount of capital, which is often called the required margin or margin for short. The amount of margin depends on the trading instrument, the amount of the transaction and the leverage.

A trading instrument is any commodity that you can use to trade, such as currency pairs, metal spot, crude oil or indices.

Trading volume is the amount you buy or sell in units of one lot. 1 standard lot is equal to 100,000 units of the base currency. You can also trade mini lots (0.1) and micro lots (0.01) according to your balance and account type. The trading volume determines the pip value, that is, the larger your trading volume, the more significant each price change will be. For example, the pip value of 1 lot in Europe and America is 10 dollars, and 0.5 lot in Europe and America is 5 dollars. You can use this tool to calculate the pip value of any position.

Leverage is a virtual credit provided by the company. The higher your leverage, the fewer the margins are required. For example, when you do not use leverage (the ratio is 1: 1), you need 100,000 Euros to open 1 lot of European and American positions; if your account leverage is 1: 200, you would only need a 500 Euro margin. Using the maximum leverage of 1: 500 provided by OctaFX, you only need 200 Euros to open a position.

Please note that if you use USD account, the required margin will be calculated as follows:

Current price * trading volume (lot) * 100,000 units / leverage.

For example, if your leverage is 1: 200 and you place an order for 0.5 lots of EURUSD at the price of 1.12931, you will need a margin of:

1.12931 * 0.5 lots * 100 000 units / 200 = 282.33 USD

The required margin is always calculated automatically by the platform. For viewing the approximate margin required to open a certain position, you can use our Forex calculator.

Balance, net worth, Free Margin, margin level

When you open a position, please note that your balance remains the same. In fact, it only includes deposits, withdrawals and closed transactions.

The amount of required margin will be deducted from the "Free Margin", which also includes floating profits, losses and deposit bonuses (if you applied for one). The “Free Margin” is the money that you always have in your position. Please note that when you open a hedge order of the opposite amount, there will be no margin requirements, however, if your “Free Margin” is negative, you will not be able to open a reverse position.

Free Margin = Balance-Required Margin + Floating Profit / Loss (+ Bonus).

Another factor that affects your profit or loss is the net worth, which is calculated as follows:

Net Worth = Balance + Floating Profit / Loss (+ Bonus)

Net worth is important because, together with the required margin, it determines your margin ratio:

Margin Ratio = Net Worth / Required Margin * 100%

If your margin level is below 15%, your open positions will be closed from the trade with the highest floating loss.

The balance, net worth, Free Margin and margin level are automatically calculated by the platform at any time and displayed in the "trading zone".

How to start trading?

Basically, all you need to do is open an account and download and install a trading platform or log in to the MT4 web terminal.

A demo account allows you to practice trading risk-free, while a live account allows you to experience the real market with a minimum deposit of $ 5.

If you are not familiar with the trading platform, be sure to check our user manual section for detailed instructions.

Information on how the foreign exchange market works, what tools and techniques are used to predict price movements, and what strategies you should adopt can all be seen in the article.

If you have any questions about the market, the website or trading terms and conditions, you can view from our FAQs page.

Whenever you encounter an unfamiliar term, noun or market phenomenon, you can check its definition and description in the FOREX terminology page.
Our award-winning customer service is happy to answer any questions 24 hours / 5 days.

If you are not sure which account is right for you, you should determine your level of knowledge in the foreign exchange market. You can fill out our questionnaire for helpful suggestions.