The foreign exchange market (FX) as a whole, consists of many types of
markets, including Spot FX, Future derivatives, Forward Derivatives, and finally the CFD
derivatives market, which is the most popular for retail clients. All forex trading
transactions combined make up the largest and most liquid financial market, with an
average daily volume of over $5 trillion.
The FX CFD derivatives market is made up of buyers and sellers, the main participants
being large international banks, who place orders via electronic trading systems. This
market is traded OTC (not traded on any regulated exchange) and as such there is no
uniform price but each of the main international banks is providing its own quotes with
the spot market acting as the point of reference for the quotes provided.
It is worth mentioning that the spot FX market is also an OTC market dominated by the
large international banks.
In forex trading, spot price of a currency pair is influenced by several factors, such
as the economic outlook and geopolitical events in that region, as well as news data
releases which may be perceived positively or negatively by the market.
Contracts for difference (CFDs), allow traders to buy (go long) or sell (go short), and
make profit or loss from price movements, without having to physically purchase and
exchange the underlying currency.
FX is quoted in pairs, with each representing a global currency or economy. The first
currency is called the ‘base’ currency (representing the volume you wish to trade) and
the second is called the ‘term’ or ‘quote’ currency (representing the current exchange
rate).
For example, the price of EUR/USD represents the amount of $USD that can be exchanged
for €1.
EUR/USD = 1.11361
This means that currently, €1 is equal to $1.11361
Prices are constantly fluctuating based on market conditions.
To put it simply, traders would go long if they believe that the base currency will rise
in value against the term currency and would profit from an increase in price. On the
other hand, if traders’ believe that the value of the base currency will fall in
relation to the term, they will place a sell trade to try to profit from falling prices.
If prices move
in the opposite direction to the traders’ forecast, they will make a loss.
FX currency trading is typically calculated in Pips, meaning that depending on your
trade size, each pip is equal to a specific monetary value of the ‘term’ currency. This
pip value is used to determine the PnL (profit or loss), based on how many pips you gain
or lose in a trade, and is also used to display spread (the difference between the bid
and ask prices).
At Global Xpitals we quote all FX pairs to an extra digit after the pip, meaning that the last
digit in any quote refers to a Point (10% of a Pip).
In FX currency trading, fractional pricing allows us to offer tighter spreads and
provide more accurate pricing.
If you are new to online forex trading, we would recommend going through our online
educational section to familiarise yourself with the market and how ‘Contracts for
Difference’ trading works. We also provide ‘watch and learn’ videos and PDF guides.
