In forex trading, the spread is the difference between the buy and sell prices quoted for a forex pair. If, for instance, the buy price on EUR/USD was 1.7645 and the sell price was 1.7649, the spread would be four pips. If you want to open a long position, you trade at the buy price, which is slightly above the market price. If you want to open a short position, you trade at the sell price – slightly below the market price.

1. WHAT IS FOREX TRADING?
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2. When trading forex, you are always trading a currency pair – selling one
currency while simultaneously buying another.
Each currency in the pair is listed as a three-letter code, which tends to be
formed of two letters that stand for the region, and one standing for the
currency itself. For example, USD stands for the US dollar and JPY for the
Japanese yen. In the USD/JPY pair, you are buying the US dollar by selling the
Japanese yen.
Some of the most frequently traded FX pairs are the euro versus the US dollar
(EUR/USD), the British pound against the euro (GBP/EUR), and the British pound
versus the US dollar (GBP/USD).
To keep things ordered, most providers split pairs into the following categories:
Four types of forex pairs:
Most forex transactions are carried out by banks or individuals by seeking to buy
a currency that will increase in value against the currency they sell. However, if
you have ever conve몭ted one currency into another, for example, when
traveling, you have made a forex transaction.
Discover a range of other benefits of forex trading
See how FX P&L works
Adjust the size and the opening/closing levels to see the impact on returns,
using EUR/USD as an example.
Major pairs - seven currencies that makeup 80% of global forex trading.
Includes EUR/USD, USD/JPY
, GBP/USD and USD/CHF
Minor pairs - less frequently traded, these often feature major currencies
against each other instead of the US dollar. Includes: EUR/GBP, EUR/CHF
,
GBP/JPY
Exotics pairs- a major currency against one from a small or emerging
economy. Includes: USD/PLN, GBP/MXN, EUR/CZK
Regional pairs - pairs classified by region – such as Scandinavia or
Australasia. Includes: EUR/NOK, AUD/NZD, AUD/SGD

3. US$ 11,250
=
Market moved by: 0.00750 (0.63%)
=
15 x $10.00 x ( 1.19650 ­ 1.18900 ) ÷ 0.0001
= Size x Value of one pip x
(Closing price level ­ Opening price level) ÷
One pip means
Closing price level
Resulting P&L*
Opening price level
Size
1
2
3
4
15
1.18900
1.19650
*All values are estimated and for information only. The resulting P&L does not
include costs and charges such as spread, commission or rollovers. Minimum
spread for EUR/USD is 0.8 pips which equates to $8 per standard contract.
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How does forex trading work?
Institutional forex trading takes place directly between two pa몭ties in an over-
the-counter (OTC) market. Meaning there are no centralized exchanges (like the
stock market), and the institutional forex market is instead run by a global
network of banks and other organizations.
Transactions are spread across four major forex trading centers in different time

4. Transactions are spread across four major forex trading centers in different time
zones: London, New York, Sydney, and Tokyo. Since there is no centralized
location, you can trade forex 24 hours a day.
Most traders speculating on forex prices do not take delivery of the currency
itself. Instead, traders will make exchange rate predictions to take advantage of
price movements in the market. The most popular way of doing this is by
trading derivatives, such as a rolling spot forex contract offered by IG.
Trading derivatives allows you to speculate on an asset’s price movements
without taking ownership of that asset. For instance, when trading forex with IG,
you can predict on the direction in which you think a currency pair’s price will
move. The extent to which your prediction is correct determines your profit or
loss.
The three different types of forex market:
There are three different ways to trade on the forex market: spot, forward, and
future.
Forex pricing – base and quote currency
The first currency listed in a forex pair is called the base currency, and the
second currency is called the quote currency. The price of a forex pair is how
much one unit of the base currency is wo몭th in the quote currency.
Spot forex market: the physical exchange of a currency pair, which takes
place at the exact point the trade is settled – ie ‘on the spot’ – or within a
sho몭t period of time. Derivatives based on the spot forex market are offered
over-the-counter by dealers like IG.
Forward forex market: a contract is agreeing to buy or sell a set amount of a
currency at a specified price, and to be settled at a set date in the future or
within a range of future dates
Futures forex market: an exchange-traded contract to buy or sell a set
amount of a given currency at a set price and date in the future.

5. In the above example, GBP is the base currency and USD is the quote currency.
If GBP/USD is trading at 1.35361, then one pound is wo몭th 1.35361 dollars.
If the pound rises against the dollar, then a single pound will be wo몭th more
dollars and the pair’s price will increase. If it drops, the pair’s price will decrease.
So, if you think that the base currency in a pair is likely to strengthen against the
quote currency, you can buy the pair (going long). If you think it will weaken, you
can sell the pair (going sho몭t).
What is leverage in forex trading?
A key advantage of spot forex is the ability to open a position on leverage.
Leverage allows you to increase your exposure to a financial market without
having to commit as much capital.
When trading with leverage, you don’t need to pay the full value of your trade
upfront. Instead, you put down a small deposit, known as margin. When you
close a leveraged position, your profit or loss is based on the full size of the
trade.
Learn more about how leverage works
This means that leverage can magnify your profits, but it also brings the risk of
amplified losses – including losses that can exceed your initial deposit.
Leveraged trading, therefore, makes it extremely impo몭tant to learn how to
manage your risk.
Learn how to manage your risk
What is margin in forex trading?
Margin is a key pa몭t of leveraged trading. It is the term used to describe the
initial deposit you put up to open and maintain a leveraged position. When you
are trading forex with margin, remember that your margin requirement will
change depending on your broker, and how large your trade size is.

6. Margin is usually expressed as a percentage of the full position. So, a trade on
EUR/USD, for instance, might only require a deposit of 2% of the total value of
the position for it to be opened. Meaning that while you are still risking $10,000,
you’d only need to deposit $200 to get the full exposure.
What is a pip in forex trading?
Pips are the units used to measure movement in a forex pair. A forex pip usually
refers to a movement in the fou몭th decimal place of a currency pair. So, if
EUR/USD moves from $1.35361 to $1.35371, then it has moved a single pip. The
decimal places that are shown after the pip are called micro pips, or sometimes
pipettes, and represent a fraction of a pip.

7. The exception to this rule is when the quote currency is listed in much smaller
denominations, with the most notable example being the Japanese yen. Here, a
movement in the second decimal place constitutes a single pip. So, if EUR/JPY
moves from ¥172.119 to ¥172.129, it has moved a single pip.
What is the spread in forex trading?
In forex trading, the spread is the difference between the buy and sell prices
quoted for a forex pair. If, for instance, the buy price on EUR/USD was 1.7645
and the sell price was 1.7649, the spread would be four pips.
If you want to open a long position, you trade at the buy price, which is slightly
above the market price. If you want to open a sho몭t position, you trade at the
sell price – slightly below the market price.
IG offers competitive spreads of 0.8 pips for EUR/USD and USD/JPY
, and 1 pip on
GBP/USD, AUD/USD and EUR/GBP.
What is a lot in forex trading?

8. Currencies are traded in lots – batches of currency used to standardise forex
trades. In forex trading, a standard lot is 100,000 units of currency. Alternatively,
you can sometimes trade mini lots and micro lots, wo몭th 10,000 and 1000 units
respectively.
Individual traders don’t necessarily have 100,000 dollars, pounds or euros to
place on every trade, so many forex trading providers offer leveraged
Learn more about how to trade forex
What moves the forex market?
Like most financial markets, forex is primarily driven by the forces of supply and
demand, and it is impo몭tant to gain an understanding of the influences that
drive these factors.
Central banks
Supply is controlled by central banks, who can announce measures that will
have a significant effect on their currency’s price. Quantitative easing, for
instance, involves injecting more money into an economy, and can cause its
currency’s price to drop.
Central banks also control the base interest rate for an economy.

9. If you purchase an asset in a currency that has a high interest rate, you may get
higher returns. This can make investors flock to a country that has recently
raised interest rates, in turn boosting its economy and driving up its currency.
However, higher interest rates can also make borrowing money harder. If money
is more expensive to borrow, investing is harder, and currencies may weaken.
News repo몭ts
Commercial banks and other investors tend to want to put their capital into
economies that have a strong outlook. So, if a positive piece of news hits the
markets about a ce몭tain region, it will encourage investment and increase
demand for that region’s currency.
Unless there is a parallel increase in supply for the currency, the disparity
between supply and demand will cause its price to increase. Similarly, a piece of
negative news can cause investment to decrease and lower a currency’s price.
As a result, currencies tend to reflect the repo몭ted economic health of the
country or region that they represent.
T
ake a look at our economic calendar to see what’s ahead, and pay pa몭ticular
attention to:
Market sentiment
Market sentiment, which is often in reaction to the news, can also play a major
role in driving currency prices. If traders believe that a currency is headed in a
ce몭tain direction, they will trade accordingly and may convince others to follow
suit, increasing or decreasing demand.
You can see sentiment from IG clients – as well as live prices and fundamentals –
on our market data pages for each market.
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Inflation figures
GDP
Production repo몭ts
Retail sales
Employment

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Forex
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The benefits of forex trading
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