Forex Involves The Trading Of Currencies

Category: Finance, Currency Trading.

Forex involves the trading of currencies.

This turnover is larger than all the worlds stock market on any given day. It is the largest financial market in the world and has an estimated daily turnover of 9 trillion dollars. The forex market does not have a fixed exchange. The forex market is completely electronic and trades are executed over the phone or on the Internet. The forex market is considered an over- the- counter( OTC) market. Until 10 years ago the forex market was the preserve of large financial institutions.

Currencies are always traded in pairs. Now an ever- increasing amount of individual traders thanks to the advent of the Internet and an increasing amount of online forex brokers are trading forex. A typical pair would be EUR/ USD( Euro over US dollars) . The second currency is the counter currency. The first currency is the base. The pair can be viewed, as the amount of the secondary currency that is needed to buy 1 unit of the first currency.

If the pair were sold the reverse would happen you would sell the Euro and buy the US dollar. If you were to buy the above pair you would buy Euro and simultaneously selling US dollars. This might sound confusing but simply think of the pair as one item and you are buying or selling one item. If you think the EUR will decrease against the US dollar you sell the EUR/ USD pair. If you think the Euro will go up against the US dollar you buy the EUR/ USD pair. When you see forex quotes you will see two numbers. The second number 2355 is the offer price and is the price traders are prepared to sell the EURO against the US dollar.

If we use the EUR/ USD as an example you might see 2350/ 2355 the first number 2350 is the bid price and is the price traders are prepared to buy euros against the US dollar. The difference between the bid and the offer price is the called the spread. The most common increment of currencies is the pip. The spread for the major currencies is usually 3 to 5 pips( explained later) . If the EUR/ USD moves from 2350 to 2351 that is one pip. Most currencies quoted to 4 decimal points. A pip is the last decimal point of quotation.

The exception is the Yen, which is quoted to 2 decimal points eg 134The term pip is just forex lingo so if a forex trader says the EURO has gone up 20 pips against the US dollar add 20 points to decimal part of EUR/ USD pair. The standard size for a lot is$ 100, 00In the last few a mini lot size of 10, 000 dollars has been introduced and this has become increasing popular. Forex is traditionally traded in lots also referred to as contracts. Forex trading is leveraged with most forex brokers offering 1% margins. A mini account can be opened with$ 300 with most forex brokers. This means you can control one standard lot of$ 100000 with$ 100Typically you would need a minium of$ 2500 to open a standard size forex account. To trade a one mini lot you need a margin of$ 100, which in turn controls$ 1000If the currency goes up 1% and if you traded one mini lot of$ 10000 you would make$ 100 dollars or 100% of your original margin.

Trading a mini account is a low cost entry to the forex market, as only$ 300 is required to open an account. Forex trading is a very lucrative market to get into and it is suggested that traders new to forex trading trade a mini account for an extended amount of time. You can still make money while you become more experienced in forex trading. As you gain more experience you can trade standard sized lots. You can trade one mini lot until you have made your first$ 100 dollars then start trading 2 mini lots. Forex trading is becoming increasing popular with traders of other financial products. Forex trading can be a very lucrative market, which no trader can dismiss.

It can be traded in amounts a lot smaller than other financial products, which makes learning forex trading safer than other markets.

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