Trading forex

What is a 'pip'?

Unlike stock price movements, which are measured in recognisable units of currency such as cents, forex changes are measured in very small units called pips.

For example, if the EUR/USD price moves from 1.20160 to 1.20170, that 0.0001 USD rise in value represents one pip.

For most major currency pairs, a pip represents a one-digit move in the fourth decimal place. One important exception to this is where the yen is the counter currency. Here the second decimal place is the one to watch.

Any extra decimal places shown in the price are known as fractional pips or pipettes.

What is a 'lot'?

Each one-pip movement in a forex price is only worth a tiny amount. So, to take advantage of these small changes in value, forex is traditionally traded in large batches called lots.

A standard lot is 100,000 units of currency. You may also come across mini lots and micro lots, which represent 10,000 and 1000 units respectively.

Small investors generally don't have access to such large amounts of money, so many forex brokers, including IG, allow clients to trade on leverage.

Leverage essentially means you can open a large market position with a relatively small deposit – called margin. Any profit or loss is based on the full position however, so losses can exceed this amount. We look at leverage in more detail in the Orders, execution and leverage course on IG Academy UAE.

Major pairs

Theoretically you can exchange any currency in the world for any other currency, which means the variety of forex pairs you could potentially trade is vast. You could even speculate on the price of the Armenian dram versus the Zambian kwacha (AMD/ZMW) if you found a broker willing to trade that pair.

In practice, however, the majority of forex trades take place on a few select currency pairs called the majors. What constitutes a major pair varies widely depending on who you speak to, but most include the following six which account for over 80% of global forex trade:

Notice that all these pairs include the US dollar, which is by far the single most traded currency in the world.

Minor and exotic pairs

Alongside the major pairs, you'll also find minor and exotic pairs. Minor pairs are made up of the world's most traded currencies, but don't include the US dollar – for example, EUR/GBP, EUR/JPY or GBP/JPY.

Exotic pairs combine one major currency with one from a smaller or emerging economy, for example GBP/MXN (sterling vs Mexican peso) or USD/PLN (US dollar vs Polish zloty). These pairs tend to be less liquid and can experience wider spreads or greater volatility.

You may come across forex categories based on a region, such as Australasian or Scandinavian currencies. These categories group together currency pairs from those regions – for example, AUD/NZD (Australian dollar vs New Zealand dollar) could be classed as Australasian, while EUR/NOK (euro vs Norwegian krona) would fall under Scandinavian pairs.

Currency pairs that include Middle Eastern currencies – such as USD/AED (US dollar vs UAE dirham) or USD/SAR (US dollar vs Saudi riyal) – are typically considered emerging or regional pairs.

What drives the forex markets?

We've looked at what forex is and how to place a trade, but why do currency prices change?

Well, currencies are effectively barometers for the health of the region they represent. So, if you place a trade hoping a particular currency will rise, you are essentially speculating on the strength of that country's economy.

In general terms, the stronger the economy of a country, the stronger its currency will be compared to other currencies.

Therefore, the factors that affect a country's economy tend to have the greatest influence on a currency's price. These include:

• Interest rates
• Inflation rates
• Government policy
• Demand for imports and exports
• Economic statistics such as a country's growth figures, unemployment levels and manufacturing data

Trading forex around major news events

The economic factors we've just covered – interest rates, inflation, GDP data – don't just appear in reports. They're released as scheduled announcements that can trigger immediate and significant price movements in forex markets.

Learning how to trade around these news events is a crucial skill. The video below walks you through five key steps to help you prepare for and respond to major announcements.

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