About Forex

Simplyfied

Fig : Mt4 Forex

Forex is simply short form of foreign exchange. Forex market is the market in where currencies are traded. The forex market is the largest, most liquid market in the world with an average traded value that exceeds $3 trillion per day and includes all of the currencies in the world. Forex is the market where one currency is traded for another this means forex is traded always in pairs. For example EUR/USD,  GBP/USD,  AUD/USD,  NZD/USD etc.To understand the forex trading we need to understand some forex terms like Quotes, Bid and Ask price, Spread, Pips, Lot, Leverage, Margin  Etc.

      Quote: As I explained forex is done in pairs,  The reason that currencies are quoted as a pair is because when you buy a currency you are selling a different one as well. but the currency pair itself can be thought of as a single unit, an instrument that is bought or sold.

For example EUR/USD=1.3629/30

In the above example of EUR/USD, EUR is a base currency and USD is a quote currency. If you buy a currency pair, you buy the base currency and sell the quote currency. And if you sell the currency pair, you sell the base currency and buy the quote currency.

      Bid, Ask And Spread Price Pips: A Forex Trading Bid price is the price at which the market is prepared to buy a specific currency pair in the Forex trading market. This is the price that the trader of Forex buys his base currency in. In the quote, the Forex bid price appears to the left of the currency quote. For example, If the EUR/USD pair is 1.2342/45, then the bid price is 1.2342. Meaning you can sell the EUR for 1.2342 USD.

       A Forex asking price is the price at which the market is ready to sell a certain Forex Trading currency pair in the online Forex market. This is the price that the trader buys in. It appears to the right of the Forex quote. For example, in the same EUR/USD pair of 1.2342/45, the ask price is 1.2345. This means you can buy one EUR for 1.2345 USD.

Fig 1: shows the bid ask and spread price of EUR/USD

      Spread: In the above fig1 You can see the two different prices with slash in order window of the metatrader4 software. If you buy EUR/USD pair, you will enter the market at 1.10456. if you sell EUR/USD PAIR then you will enter the market at 1.10426. The difference between these two prices is referred to as the 'Spread'. The spread is essentially the profit a broker or bank makes for you to enter the trade (your transactional cost). The wider the spread the more expensive it is for you to trade, whereas the thinner the spread the cheaper it is to enter the trade. In the above example of fig1 spread is equals to 3.

      Pips: “PIP” stands for Point In Percentage. More simply though, a pip is what we in the forex market would consider a “point” for calculating profits and losses. A "pip" is the smallest whole increment in any Forex pair. For pairs quoted in 3 decimal points a pip increment is based on the second decimal. For pairs quoted in 5 decimal points a pip increment is based on the fourth decimal, like the EURUSD below.

Example:

EURUSD: A movement from 1.10426 to 1.10456 is a 3 pip move

In USD/JPY, a movement from 104.471 to 104.481 is 1 pip

      Lot: A lot is the smallest trade size available. Different broker has different standard lot size. For example; FXCM accounts have a standard lot size of 1,000 units of currency. Account holders can however place trades of different sizes, so long as they are in increments of 1,000 units like, 2,000, 3,000, 15,000, 112,000 etc.

      Leverage/Margin: All trades are executed using borrowed money. This allows you to take advantage of leverage. Leverage of 400:1 allows you to trade with $1,000 in the market by setting aside only $2.50 as a security deposit. This means that you can take advantage of even the smallest movements in currencies by controlling more money in the market than you have in your account. On the other hand, leverage can significantly increase your losses. Trading foreign exchange with any level of leverage may not be suitable for all investors.

     The specific amount that you are required to put aside to hold a position is referred to as your margin requirement. Margin can be thought of as a good faith deposit required to maintain open positions. This is not a fee or a transaction cost, it is simply a portion of your account equity set aside and allocated as a margin deposit.