How Currencies are Named in the Foreign Exchange Market
To learn the naming formats used in the Forex market we shall first look at how currencies are named and then look at how currency pairs are named. Understanding these naming formats is one the basics as currency pairs are the main instruments being traded in the foreign exchange market.
The naming format has three letters, explanation of each letter is shown below:
First two letters - identify name of country
Last letter - identify the currency
USD= USA Dollar
This name is also commonly referred to as a symbol, therefore for US Dollar, the name or symbol is USD.
Examples of Other Symbols
How Currencies are Transacted in the Foreign Exchange Market
Forex Trading is the buying of one currency with another, exchanging the money for a different currency of the same value, through a bank or a broker, who acts as the custodian.
Since one currency is traded for another, each transaction is exchanged in pairs of two - called a currency pair, For example, EUR/USD. When a transaction is made it is the simultaneous buying of one and automatically selling the other. So if you buy EUR you automatically sell USD and vice versa.
Example of How The Pair EURUSD is Transacted:
To exchange EUR for US Dollar, we use the EURUSD
EURUSD is used to facilitate business between the European Union and United States. However, in the Foreign Exchange Market these pairs are globally available for anyone to freely transact with and speculate with - because these currencies have been floated freely in the interbank exchange market. As long you have the capital to speculate with in the FX market.
In this case The EUR is the base and USD is the quote currency.
The base is always 1 unit, and the exchange rate quote is in terms of the quote currency.
Therefore, if exchange rate of EURUSD = 1.50000, it means 1 Euro = 1.5 US dollars. So for every 1 Euro you have, you can buy 1.5 dollars.
In Forex, you cannot buy 1 or 2 dollars, you can only buy a minimum of 1,000 units of currency, which is a micro lot. The standard unit of trading is called 1 standard lot or 1 contract. 1 contract is equal to 100,000 units. The contract can also be divided into smaller contracts called mini lot = 10,000 units and micro lot= 1,000 units.
Because the USD or $ is the most popular in the FX Market, most people will refer to the standard contract as equal to $100, 000. Also because most trading accounts used by investors are Dollar Accounts($), then 1 standard lot of 100,000 units (Dollars) will also be equal to $100,000.
Forex is traded using contracts provided by a broker. A contract represents the standard units used in transactions. The Quote Price commonly referred to as the exchange rate is the price at which one buys or sells in a particular transaction.
Because 1 contract is equal to $100,000 units and most people cannot afford, the Forex broker gives you leverage to trade with. when a broker gives you leverage of 100:1 it means that you can buy or sell 1 contract with $1000 of your money. This is because leverage 100:1 means the broker gives you 100 dollars for every $1 you have. So if you have $1000 the broker gives you 1000*100= $100,000 to transact with.
Examples of Symbols on MT4 Software
Showing Symbols in MT4 Platform
Once you open the MetaTrader platform you may find that some symbols are not listed. So, now you will start saying - oh, my broker only provides 5 symbols, I wanted to trade the EURJPY which is one of my most popular Forex pairs - but my broker does not provide it on their MT4 - well before you change your broker, we will show you where to retrieve that pair you want are looking for, and show you where your broker has hidden it.
For Example you may open the MT4 and only get the EURUSD as shown below:
To show a list of all available symbols follow the steps below:
How to Display and Show all the Symbols Available
All the symbols available will be shown the same way as the example below:
List of all Available Symbols Shown on the MT4 Platform
From the above list of all symbols, one can select the pair they want, by right clicking on any symbol, then selecting "open chart". Once the chart is opened one can then open the chart for the newly selected symbol using the chart that is opened.
Once you have selected all the pairs that you want, you may want to hide all the others that you are now not using. To hide those that you are not interested with, follow the steps shown below:
How To Hide Symbols To Save Internet Bandwidth
Hiding of pairs is done so as to save internet bandwidth that the MetaTrader 4 is using. There is no need of streaming price quotes of 50 symbols if you are only interested in 1 or 2 instruments, you only need streaming prices for the 2 symbols only.
For example if you only transact the Forex majors, you can select the show all the symbols, then select all the 4 majors - EURUSD, GBPUSD, USDJPY and USDCHF, open their charts and then select hide all. That way you will only receive streaming price quotes for these 4 instruments only.
Calculating Profits in the Foreign Exchange market
1 Forex contract gives a profit of $10 for every 1 pip.
1 pip is the smallest movement in price of exchange rate, and it is equal to 1 hundredths(1/100)of 1 cents, or the equivalent of 0.01cents.
Note: there is now the fractional pips, the fractional pips is the fifth decimal point in a price quote, but this fifth decimal point is not the pip, the pip is the fourth decimal point.
So if you have 1 contract and exchange rate moves by 0.01 cents you make profit of $10.
If the exchange rate moves by 1 cents and you have 1 contract, your profit will be $1,000, because 1 cents movement is equal to 100 pips and 1 pip profit per lot is $10.
Because most pairs move less than 1 cents a day, on average a contract can yield a profit of below or just about $1,000 in a day depending on the amount of pip movement.
If a pair moves 20 pips in your favor you will make $200 dollars with 1 standard contract and if the same moves 50 pips in your favor you will make $500 dollars.
This is how profits are generated in the Foreign exchange market.