Basics of Forex Market

forex market

The trading concept of Forex market is the one based on transaction of buying currency for another and then inverse the operation of selling the currencies in order to get profit. This kind of transaction can be done with almost all currencies in the world. Let’s check the following example:

Example: A trader has 1 000 GBP. Exchange rate of GBP/USD is 1.6000. It means that trader can sell the GBP he has for 1 600 USD while hoping that GBP will fall against the USD. When the rate falls to 1.5900, trader will be able to decide to make reverse operation by purchasing GBP for 1 600 USD. The result will be 1 006.28 GBP which means trader has 6.78 fixed profit.

From this example, trader can earn profit from both from rises or falls of currencies against each other. Currencies will always rise of fall against the other one.

When trader checks the quotation table of Forex, there will be two rates in front of currency pairs. The two rates indicate the rate to buy and the rate to sell.

Currency pairs are the main instrument in Forex trading. The number of currency pairs in the Forex market exceeds 100. Some pairs are traded within the larger volumes while some are in smaller volumes. About 66% of all volumes traded in foreign exchange, comes to the major pairs. These pairs include GBP/USD, USD/CAD, AUD/USD, USD/CHF and EUR/USD. All of them are currency pairs involving USD because USD known as world reverse currency. Thus currency pairs without USD will be referred as cross currency pairs. The rate calculation of these pairs will be carried out with USD help such as calculation for EUR/JPY will be EUR/JPY to USD/JPY.

In currency pairs, there are always two currencies. Each will be represented by three capital letters separated by a slash mark. The three letters on the left represent base currency and the three letters on the right represent quoted currency. The second currency reflects the value of base currency. For example, EUR/USD is 1.6000. It means that €1 can be purchased for US$1.4.

The classic version of quotation has the fourth decimal pricing format. Meanwhile, the minimum quotation change falls on the last digit and referred as pip or point. For example, the change of EUR/USD is 1.4000 to 1.4001. It means that the currency rate raises one pip higher. This format only applies to the classic accounts. The ECN and NDD accounts use the pricing format of fifth decimal.

When checking on the quotation table of Forex, there will be two rates seen in the table. The rates include bid rate and ask rate. Bid rate is the sell rate. Ask rate is the buy rate. Sell orders are opened only at bid price while buy orders only opened at ask price. The difference from bid to ask is referred as spread and it determines in points.

In Forex market, leverage and margin are both important. Forex trading commonly occurs with the large volumes of money. 100.000 units of base currency are the standard of one lot. Therefore leverage is needed. Leverage lets traders to trade larger sums while having smaller sums in the trading account. When a trader gets a 1:100 leverage, he will have 1 000 margin. In other word, he will be able to trade for 1 000 currency units.

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