Forex Basics
With The Popularity of Forex growing because of the advancement in technology this tutorial will explain to traders the basics of forex trading. Previously Forex trading was only accessible to large financial institutions such as banks and wealthy individuals only. But with the growth of the internet forex trading has now become available to more investors worldwide. For the beginner investor this tutorial will explain about the various trading basics that are required before starting to trade the online market.
What is the Structure of the Market?
The market is not traded in one central market place like the stock exchange Market: instead forex is traded in an Over The Counter (OTC) market. This means that there is no central exchange market place that takes place, instead forex trading is done through a network of big international banks and this network is known as the interbank network.
Market is the largest financial market in the world that trades $7.2 trillion every day. Forex is also the most liquid market in the world, meaning that a trader can place a trade in the market at any time of the day or night because there are always other traders willing to exchange their currency. Forex is open 24 hours a day and it opens on Sunday at 5 PM EST to 5PM EST on Friday.
All trades in the market are based on contracts which are agreements between the traders and these contracts are settled using cash.
Trading Currency Pairs in the Market
The market is a place where one currency is exchange for another so as to facilitate international trade.
However, for investors trading currencies, these investors trade and exchange money for the purpose of speculation for profit. 95% of all participants in the market are retail investors and retail traders.
Because forex trading is the exchange of one currency for another, currencies are therefore traded in pairs of two, for example the EURO is traded against the US Dollar using the currency pair EURUSD.
Because currencies are traded in pairs, when a trader buys one currency they simultaneously sell the other currency. For example when a trader trading EURUSD buys this currency, they will be buying EUR and simultaneously selling USD
Most Traded Currency Pairs in Forex
The 4 most liquid pairs in the market are:
1.EURUSD - Euro versus US Dollar
2.USDJPY - US Dollar versus Japanese Yen
3.GBPUSD - British pound versus US Dollar
4.USDCHF - US Dollar versus Swiss franc
These 4 currency pairs are the most traded currency pairs in the market and most traders only trade these 4 currency pairs.
Forex Currency Quotes and Pips
Forex currency pairs are quoted in the format known as a currency quote. For example EURUSD currency quote will be quoted in a format that looks like 1.2500. This is the price at which one EURO will be exchange for how many US Dollars. The currency quote of 1.2500 means that 1 EURO will be exchanged for 1.2500 US Dollars.
The smallest movement of a currency pair is known as a pip. 1 pip is a one point move in the exchange rate of a currency pair. For example when EURUSD moves from 1.2500 to 1.2501 that is a one pip move.
The pip is used to calculate the profit that a trader makes from one trade. For example a trader can make a profit of 10 pips or 20 pips. The number of pips will then be used to calculate the total amount of profit in money terms that a trader will have then made from their trade.
Brokers
Brokers connect retail traders and investors to the online trading market. Traders must trade the online currency exchange market through brokers. Brokers provide traders with accounts that traders can use to the trading market. Traders will just login to the trading software that they will download from their broker using their account and they can then place trades on the online trading from their account.
Brokers also provide traders with leverage so as to help traders to access borrowed capital so that they can be able to open contracts that are traded in unit of 100,000 units of currencies known as standard lots or standard contracts.
Because most retail traders cannot afford this amount of money, brokers provide these retail traders with leverage. Leverage option of 100:1 which is the most commonly used leverage in forex means that traders can borrow from their brokers up to 100 times what they have as their capital, therefore if a trader has $1,000 capital in their account they can borrow up to 100 times this amount which means $1,000 multiplied by 100 is equal to $100,000 and using this leverage a trader with only $1,000 capital can now be able to trade 1 standard lot of 100,000 units of currency.
This leverage option where traders can trade many times what they have as capital and borrowing the rest on leverage is what makes forex popular to many new investors as well the experienced investors.
