Forex basic

The word FOREX is derived from Foreign Exchange and it is the largest financial market in the world. Unlike other markets the Forex market is open 24 hours a day.

It is estimated that anywhere around 80% of the Forex market is speculative. People don’t buy or sell currency to actually taking delivery of the currency. Instead they are speculating on the movement of the currency.

The most traded currency is the US Dollar, followed by Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc(CHF). Currencies are traded in pairs and the rate at which they are exchanged is called the exchange rate. The exchange rate will consist of two numbers. The first number is called the bid and the second number is called the offer (or ASK). For example for EUR/USD you might see 0.9850/0.9853. The first number is the bid price, the price where people willing to buy the currency. The second number is the offer price, the price where people are willing to sell the currency. If you want to buy at 0.9850, you must want for people willing to sell at that price. But if you want to buy instantly you can buy at 0.9853, where there are people willing to sell.

You will also notice that there is a difference between the bid and the offer price and that is called the spread. For major currency, the spread will be lower. It is normal to see the USD / JPY to have 2 spread, and USD / EUR to have 3 spread.

The increment of currencies is calleed PIP. If the EUR/USD moves from 0.9850 to 0.9851 that is one Pip. A pip is the last decimal place of a quotation.

Forex is traditionally traded in lots also referred to as contracts. The standard size for a lot is $100,000. In the last few years a mini lot size has been introduced of $10,000 and this again may change in the years to come.

To control large amount of money, you can use leverage, or financing your account with credit. You can use margin for this. The loan in the margined account is collateralized by your initial margin (deposit), if the value of the trade drops sufficiently, the broker will ask you to put in more cash, or sell your position to increase your cash. By using leverage, you could control $100,000 with only $1,000.