What is FOREX?
FOREX or Foreign Exchange is an international OTC(Over The Counter)market for converting one currency to another a cost. This market determines foreign exchange rates for every currency.It includes all aspects of buying, selling and exchanging currencies at current or determined prices.
Why is Forex so important?
If we take statistics into account, the daily trading in Forex is estimated to be at a staggering amount of $5 Trillion each day. This fact alone makes it the biggest market with the most liquidity among any financial marketplace, beating stock exchange. Great Britain holds the biggest share of the Forex markets, with about 40% of all trading happening in London.
This happened because in 1979 all foreign exchange control methods were cast off in the country. And there was also a very good infrastructure to induce currency trading. The spine of global investment and international trading is built up on Forex. Forex plays a vital part in supporting exports as well as imports to any country, without which, it would have been worse off.
This flexibility and opportunity has attracted many investors and traders world wide. Besides FOREX traders can attain massive leverage to take big positions making it one of the most popular choices for retail traders to invest in. Many trade experts, however, warn against trading with big leverage because it increases your potential investment losses. In some cases, this loss might be more money than what actually you have available to invest. Indeed, the higher the leverage, the higher the losses will be.
To learn How To Start Trading FOREX, check out our page covering all aspects of trading for a beginner here.
IMPORTANT ELEMENTS OF FOREX TRADING
To know more about FOREX you must know the key elements of this market and how it works.
CURRENCY PAIRS
In the FOREX market, currencies always trade in pairs. When you exchange U.S. dollars for euros, there are two currencies involved, so the exchange always shows the value of one currency relative to the other. The EUR/USD price, for example, lets you know how many U.S. dollars (USD) it takes to buy one EURO(EUR).
Each FOREX pair will have a market price associated with it. The price refers to how much of the second currency it takes to buy one unit of the first currency. If the price of the EUR/USD currency pair is 1.1200, this means that it costs 1.1200 U.S. dollars to buy one euro.
To put it into perspective , since in Foreign Exchange on currency is converted to another it operates on trading pairs of two currencies at a time. Because of the trade made to convert a currency to another. The value of one currency goes up compared to the other one. And Traders benefit form the difference.
POPULAR FOREX CURRENCY PAIRS
The FOREX market uses symbols to designate specific currency pairs. The euro is symbolized by EUR, the U.S. dollar is USD, so the euro/U.S. dollar pair is shown as EUR/USD. Other commonly traded currency symbols include AUD (Australian dollar),GBP (British pound), CHF (Swiss franc), CAD (Canadian dollar), NZD (New Zealand dollar), and JPY (Japanese yen).
The most popular currency pairs for traders are,
- EUR/USD (Euro/US Dollar)
- USD/JPY (US dollar/Japanese Yen)
- GBP/USD (British Pound/US Dollar)
- AUD/USD (Australian Dollar/US Dollar)
- USD/CAD (US Dollar/Canadian Dollar)
- USD/CNY (US Dollar/Chinese Renminbi)
- USD/CHF (US Dollar/Swiss Franc)
- USD/HKD (US Dollar/Hong Kong Dollar)
- EUR/GBP (Euro/British Pound Sterling)
- USD/KRW (US Dollar/South Korean Won)
PIPs in Forex
Despite the volatility and size of the FOREX market the price changes aren’t very major since that is well regulated and any sudden price hike may have a big impact in an economy.
The price fluctuations in FOREX trading happen in pips. A pip is a standardized unit and is the smallest amount by which a currency quote can change. It is usually $0.0001 for U.S.-dollar related currency pairs, which is more commonly referred to as 1/100th of 1%, or one basis point.
ASK/ BID
ASK: Ask price is the price a trader will buy a currency pair at.
BID:The Bid price is the price a forex trader is willing to sell a currency pair for.
Both of these prices are given in real-time and are constantly updating
Next Lesson: How To Start Trading Forex?
