Forex an abbreviation of foreign exchange consists of trading one type of currency for another.
It is the largest market in the world with daily trading volume of over $4 trillion.
Not only forex exchange is the largest market, it is also one of the fastest growing markets in the world, with reports suggesting its growth at a mind boggling 20% in the last 5 years.
The forex markets are open 24 hours a day and 5 days a week. Unlike other financial markets, the forex markets has no physical location and no central exchange. However, it’s most important trading centers are located in London, New York, Tokyo, Zurich, France, Hong Kong, Singapore, Paris and Sydney. Forex trading works much like the stock markets, you buy when the prices are supposed to rise and sell when the prices are supposed to fall. The benefit of trading in forex markets is that you do not have to choose from thousands of companies or sectors.
However before venturing into the forex markets on your own, it will be wise to first educate yourself with some of the basic concepts of the forex trading.
- Bid/Ask Spread: Currency pairs are quoted with a bid and ask price, i.e. buying and selling price. Bid is the price your broker is willing to buy a particular counter at, thus, you as a trader are required to sell at this price. Whereas, the ask price is the price at which your broker is willing to sell a counter, thus you have to buy a pair at this price.
- Pips: Pips are smallest possible movement in any counter, be it up or down. Pip stands for price interest point. For example, a move in the EUR/USD from 1.2134 to 1.2138 equals 15 pips.
- Leverage: Unlike cask markets, in forex markets you are only required to have a margin deposit. In simpler terms, you can buy or sell a particular counter with a fraction of the actual amount and the rest is granted to you by the broker. For example the standard lot size in forex market is $100,000 USD and your broker offers 100:1, this means you are only required to have 1% of the $100,000 USD, i.e.only $1000 USD to trade 1 lot of USD.
- Margin Call: Margin calls are reminders given by your brokers every time the balance in your account falls below the maintenance margin. If you are unable to deposit the required margin within a specific duration your broker will close your position.
Though, the Forex market looks attractive and full of profits, it is of utmost importance to understand every aspect of trading. Thoroughly understanding the basic of the market will give you an edge over thousands of traders who simply jumped in the bandwagon in search for jackpots.