The term ‘Forex’ is quite popular today and a hot topic of discussion, it stands for Foreign Exchange. Forex trading in layman’s terms is the trading of currencies from different countries against each other. For example the US Dollar ($) against the Japan Yen (¥).
The Forex trading takes place in the Foreign Exchange market, which is considered as the largest and most liquid financial market where currencies worth over $4 trillion are exchanged everyday. One of the most amazing things about Forex Market is that, there is no physical marketplace to carry out Forex trading. It is done electronically over-the-counter round the clock. The Forex market remains open round the clock for 5 days in a week. The trading takes place from Monday to Friday 24×5 , the market is closed on Saturday and Sunday.
The currencies that have the highest trading volume and most traded on the Forex market are the US Dollar ($) , Euro (€) , GBP(£) and Japan Yen (¥). Other currencies are also traded with sufficient liquidity.
The biggest advantages of Forex trading is the ‘leverage’ that is provided by the Forex brokers. Usually the stock market or the futures market brokers offer a leverage in the range of 2:1 and 10:1 respectively. But most of the Forex trading broker offers leverages of up to 500:1 depending on the size of the trade. Which means if I want to buy $100,000 with a leverage of 500:1 , I would need only $200 in my margin account with the broker. The standard Forex trading is done with “LOTS” and fractional LOT (0.1 Lot being the lowest Lot size with some brokers), 1 LOT representing 100,000 units of the currency being traded.
A leverage of 500:1 sounds risky, but its you who decide to use the leverage. Generally traders find it comfortable to use 100:1 Leverage , since currency prices on an intraday basis changes by less than 1% ,which makes it less risky than it seems to be. The leverage must be used wisely, other wise small change in price can generate a margin call in your account and subsequently close the positions automatically causing you to lose your invested money. It is recommended to use leverage up to 200:1 cautiously, beyond that it is too risky.
Forex Terminologies :
Base currency :
The first currency in a currency pair (e.g. EUR/USD). It shows how much worth the base currency (EUR)is, as measured against the second currency (USD). For example, if the EUR/USD ( Euro / U.S Dollar) rate equals 1.0760, then one Euro is worth USD 1.0760 . In the forex market, the US dollar is mostly the base currency for majority of quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair (USD/JPY , USD/CHF etc.). The exceptions to this are the British pound (GBP), the Euro (EUR) and the Australian dollar (AUD).
The price at which the market is prepared to sell a product or asset.
The price at which the market is prepared to buy a product or asset.
Bid/ask spread or simply “Spread ” :
The difference between the bid price and the ask (offer) price.
The smallest unit of price change for any foreign currency. Pips refer to digits varied at the fourth decimal place, i.e. 0.0001. offer) of the price.
Traders who have sold, or shorted, an asset (EUR/USD or GOLD) as they are bearish on the price of the asset.
Traders who have bought, or longed, an asset (EUR/USD or GOLD) as they are bullish on the price of the asset.
An active trade with unrealized profit or loss, which has not been offset by an equal and opposite deal.
It is the unit to measure the deal size. The standard lot size is 100,000. Brokers also allow fractional LOT size to tarde (0.1 Lot, 0.5 Lot).
A request from a broker to deposit additional funds to keep a position open that has moved against the customer. Margin call is directly linked to leverage. High leverage risks frequent margin calls in the price moves against client’s position.
An instruction to execute a trade with the broker or on broker’s trading platform.