What Forex Trading Demystified
Forex involves the
trading of currencies. It is the largest financial market in the world
and has an estimated daily turnover of 1.9 trillion dollars. This
turnover is larger than all the worlds’ stock market on any given day.
The forex market does not have a fixed exchange. The forex market is considered an over-the-counter (OTC) market. The forex market is completely electronic and trades are executed over the phone or on the Internet. Until 10 years ago the forex
market was the preserve of Large financial institutions. 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.
Currencies are always traded in pairs. A typical pair would be EUR/USD
(Euro over US dollars). The first currency is the base. The second
currency is the counter currency. The pair can be viewed, as the amount
of the secondary currency that is needed to buy 1 unit of the first
currency. If you were to buy the above pair you would buy Euro and
simultaneously selling US dollars. If the pair were sold the reverse
would happen you would sell the Euro and buy the US dollar. 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 Euro will go up against the
US dollar you buy the EUR/USD pair. If you think the EUR will decrease
against the US dollar you sell the EUR/USD pair.
When you see forex quotes
you will see two numbers. If we use the EUR/USD as an example you might
see 1.2350/1.2355 the first number 1.2350 is the bid price and is the
price traders are prepared to buy euros against the US dollar. The
second number 1.2355 is the offer price and is the price traders are
prepared to sell the EURO against the US dollar. The difference between
the bid and the offer price is the called the spread. The spread for the
major currencies is usually 3 to 5 pips (explained later).
The most common increment of currencies is the pip. If the EUR/USD moves
from 1.2350 to 1.2351 that is one pip. A pip is the last decimal point
of quotation. Most currencies quoted to 4 decimal points. The exception
is the Yen, which is quoted to 2 decimal points eg 139.41. The 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.
Forex is traditionally
traded in lots also referred to as contracts. The standard size for a
lot is $100,000. In the last few a mini lot size of 10,000 dollars has
been introduced and this has become increasing popular. Forex trading is leveraged with most forex
brokers offering 1% margins. This means you can control one standard
lot of $100000 with $1000. Typically you would need a minium of $2500 to
open a standard size forex account.
A mini account can be opened with $300 with most forex brokers. To trade a one mini lot you need a margin of $100, which in
turn controls $10000. If 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. 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. Trading a mini account is a low cost entry to the forex market, as only $300 is required to open an account. You can still make money while you become more experienced in forex
trading. You can trade one mini lot until you have made your first $100
dollars then start trading 2 mini lots. As you gain more experience you
can trade standard sized lots.
Forex trading is becoming
increasing popular with traders of other financial products. It can be
traded in amounts a lot smaller than other financial products, which
makes learning forex trading safer than other markets. Forex trading can be a very lucrative market, which no trader can dismiss.
