What is Forex
Forex stands for Foreign Exchange and Forex Trading refers to foreign currency trading in the foreign exchange market. The terms FX, Forex, Foreign-Exchange market, currency market are all synonyms of Forex market.
Exchange of currency is important as it is vital for the process of foreign trade and business. If you live in Europe and want to buy something from the United States then you have the pay the American company in US dollar rather than Euros. So, you will have to exchange an equivalent amount of US dollars for euros. This inherent need of international businesses to exchange currencies makes the Forex market the largest and the most liquid financial market in the world.
One unique feature of the Forex market is that there is no centralized market place from where all the trading happens. Today, it can be done electronically or over the counter at various institutions. It is open 5 and half days a week for 24 hours. The major financial centers for currency trading are London, Paris, New York, Tokyo, Zurich, Frankfurt, Sydney, Hong Kong and Singapore. Since, these are situated in various time zones; Forex trading is always active in some part of the world.
Types Of Forex Markets
There are three ways to conduct Forex trading: the spot market, the futures market and the forwards market. Of these the spot market is the largest. The forwards and futures market are more beneficial and popular with businesses that want to hedge their foreign exchange risks on a specific date in future.
Spot Market: It is the market where currencies are traded at the current price. This price is based on the supply and demand and takes in to account various factors like interest rates, economic conditions, political situations and the people’s perception about a currency’s value against others. A deal hence confirmed is called a spot deal. The transaction takes place two ways when one party exchanges a certain amount of a particular currency for an equivalent amount in desired currency at a specified exchange rate. The settlement happens in cash and can take up to two days.
Forwards and Futures market: These market trades in contracts that are representative of certain currencies at a specified rate and a date in future for settlement. In the forward market, the contracts are traded over the counter between the trading parties and the terms and conditions are determined by them.
Future contracts are traded in public commodity market. It has a standard size and a specified delivery and settlement date, and a minimum price increment that cannot be changed. Both these types of contracts are binding and are settled for cash.
Big multinational companies trade in these markets to hedge the risk of exchange rate fluctuations.
Terms of use Forex Quote
In our previous article we had explained in detail how to read a Forex quote. Now, we will try to understand the various terms that can be used in relation to a Forex quote.
Cross Currency: When US Dollar is not used in a currency quote then the term Cross Currency is used to denote it. Say there is a quote for GBP/EUR or EUR/JPY. Here, there is no USD involved so, it is called Cross Currency. However, these pairs are not as actively traded on the Forex market as are the ones with USD.
Bid and Ask: When trading of a currency pair happens, there is usually a bid price (to buy) and a ask price (to sell). These prices are in relation of the base price. Let us understand this with the help of an example:
USD/EUR = .78/05. Here bid is .78 and ask is.78+.05 i.e. .83.
The ask price is the price quoted in reference to the currency and is the amount that has to be paid when buying one unit of the said currency with respect to the base currency. The sell price reflects how much of the quoted currency will be obtained when selling one unit of the said currency with respect to the base currency.
When you intend to buy this currency pair, it means you want to buy the base currency and should check out the ask price. Here to buy one USD you have to pay .83 EUR. When selling this pair, you need to look up the bid price. This means that the market will give you .78 EUR in exchange for one USD.
Spreads and Pips: The difference between the bid and ask price is called the spread. Let’s understand this with the help of an example.
EUR/USD = 1.2600/04, the spread here is 0.0004 or 4 pips.
Pips arealso known as points. These movements may seem tiny but one should understand that even the tiniest point change can result in the profit or loss of thousands of dollars. It is also one of the reasons why speculators are so interested in the Forex market.
The smallest amount a price can move in a currency quote is called a pip. For USD, EUR, GBP, one pip would be 0.0001. But with JYP one pip would be 0.01, since the currency is quoted to two decimal places.
Currency Pairs in the Forwards and Futures Markets
In spot markets, currencies can be quoted against USD or with USD as the base currency. But, in case of forwards or futures markets, foreign exchange always is quoted against the U.S. dollar. You will see that the pricing is regarding you many USD you have to spend to buy a unit of another currency. This means that the quotes of the forwards/futures market and the spot market will not always be similar to one another.
So, we have covered all the basics of Forex with this article. We will concentrate on the intricacies of Forex Trading in the upcoming articles on this topic.
The Basic of Currency Trading
Forex stands for Foreign Exchange and Forex Trading refers to foreign currency trading in the foreign exchange market. The terms FX, Forex, Foreign-Exchange market, currency market are all synonyms of Forex market.
Exchange of currency is important as it is vital for the process of foreign trade and business. If you live in Europe and want to buy something from the United States then you have the pay the American company in US dollar rather than Euros. So, you will have to exchange an equivalent amount of US dollars for euros. This inherent need of international businesses to exchange currencies makes the Forex market the largest and the most liquid financial market in the world.
One unique feature of the Forex market is that there is no centralized market place from where all the trading happens. Today, it can be done electronically or over the counter at various institutions. It is open 5 and half days a week for 24 hours. The major financial centers for currency trading are London, Paris, New York, Tokyo, Zurich, Frankfurt, Sydney, Hong Kong and Singapore. Since, these are situated in various time zones; Forex trading is always active in some part of the world.
Types Of Forex Markets
There are three ways to conduct Forex trading: the spot market, the futures market and the forwards market. Of these the spot market is the largest. The forwards and futures market are more beneficial and popular with businesses that want to hedge their foreign exchange risks on a specific date in future.
Spot Market: It is the market where currencies are traded at the current price. This price is based on the supply and demand and takes in to account various factors like interest rates, economic conditions, political situations and the people’s perception about a currency’s value against others. A deal hence confirmed is called a spot deal. The transaction takes place two ways when one party exchanges a certain amount of a particular currency for an equivalent amount in desired currency at a specified exchange rate. The settlement happens in cash and can take up to two days.
Forwards and Futures market: These market trades in contracts that are representative of certain currencies at a specified rate and a date in future for settlement. In the forward market, the contracts are traded over the counter between the trading parties and the terms and conditions are determined by them.
Future contracts are traded in public commodity market. It has a standard size and a specified delivery and settlement date, and a minimum price increment that cannot be changed. Both these types of contracts are binding and are settled for cash.
Big multinational companies trade in these markets to hedge the risk of exchange rate fluctuations.
Terms of use Forex Quote
In our previous article we had explained in detail how to read a Forex quote. Now, we will try to understand the various terms that can be used in relation to a Forex quote.
Cross Currency: When US Dollar is not used in a currency quote then the term Cross Currency is used to denote it. Say there is a quote for GBP/EUR or EUR/JPY. Here, there is no USD involved so, it is called Cross Currency. However, these pairs are not as actively traded on the Forex market as are the ones with USD.
Bid and Ask: When trading of a currency pair happens, there is usually a bid price (to buy) and a ask price (to sell). These prices are in relation of the base price. Let us understand this with the help of an example:
USD/EUR = .78/05. Here bid is .78 and ask is.78+.05 i.e. .83.
The ask price is the price quoted in reference to the currency and is the amount that has to be paid when buying one unit of the said currency with respect to the base currency. The sell price reflects how much of the quoted currency will be obtained when selling one unit of the said currency with respect to the base currency.
When you intend to buy this currency pair, it means you want to buy the base currency and should check out the ask price. Here to buy one USD you have to pay .83 EUR. When selling this pair, you need to look up the bid price. This means that the market will give you .78 EUR in exchange for one USD.
Spreads and Pips: The difference between the bid and ask price is called the spread. Let’s understand this with the help of an example.
EUR/USD = 1.2600/04, the spread here is 0.0004 or 4 pips.
Pips arealso known as points. These movements may seem tiny but one should understand that even the tiniest point change can result in the profit or loss of thousands of dollars. It is also one of the reasons why speculators are so interested in the Forex market.
The smallest amount a price can move in a currency quote is called a pip. For USD, EUR, GBP, one pip would be 0.0001. But with JYP one pip would be 0.01, since the currency is quoted to two decimal places.
Currency Pairs in the Forwards and Futures Markets
In spot markets, currencies can be quoted against USD or with USD as the base currency. But, in case of forwards or futures markets, foreign exchange always is quoted against the U.S. dollar. You will see that the pricing is regarding you many USD you have to spend to buy a unit of another currency. This means that the quotes of the forwards/futures market and the spot market will not always be similar to one another.
So, we have covered all the basics of Forex with this article. We will concentrate on the intricacies of Forex Trading in the upcoming articles on this topic.
The Basic of Currency Trading
Do you think currency trading is easy? Well, think again. It is not easy rather it is very tough. If you want to succeed in theinvestment market, you have to educate yourself with the basics of the market. And yes, success comes from practice. Let’s delve into the basics of currency trading – what it is and how it works.
The Forex or currency trading market is the largest investment market in the world. It is growing annually at a substantial rate. For a long time, the volume of the trade came from the professional trader but these days the currency trading platform for retailers have also improved. So, we can see them taking the plunge into the currency market to meet their investment goal.
How Currency Trading Works?
Currency Trading is open 5 days a week and for 24 hours a day. It is closed from Friday evening to Sunday evening. But since, all the large currency trading markets are situated in different time zone, there is some overlap in the trading sessions
Currency is traded in lots. They can be of varied sizes. Say for e.g. microlot is 1,000 units,mini lot is 10,000 units and a standard lot is 100,000 units of a currency. If you are trading in U.S. dollars, a micro lot will be $1,000.
Pairs and Pips
All currencies are traded in pairs. In a Forex market to buy a currency, you have a sell another currency.All currencies are priced out to the fourth decimal point. The smallest change or increment of in the price of a currency is called a pip or percentage in point.
Since the risk of movement in currency is minimum in a micro lot, retailer and small investors or beginners prefer totrade in that size. It makes the risks more manageable.
Fewer Products as compared to Stock Market
Stock markets have thousands of stocks that can be traded which make it a lot more challenging to manage it. In case of Forex, the major volume currency trading is limited to 18 currency pairs. The eight currencies that are traded most are the U.S. dollar (USD), Canadian dollar (CAD), euro (EUR), British pound (GBP), Swiss franc (CHF), New Zealand dollar (NZD), Australian dollar (AUD) and the Japanese yen (JPY). Even though managing currency trading is not easy, but having fewer options makes it more manageable.
What Currency Movement happens?
Currency market is also driven by the concept of demand and supply. If there is demand for U.S dollars and its supply is limited its price will increase and vice versa. Other factors like economic condition, political situation, etc., of a country also affect the currency value and its movement.
Conclusion
In order to benefit from the Forex market and learn the winning secrets, you need a lot of practice and the ability to analyze the market trends. With a bit of interest, education and practice, youcan take the plunge into currency trading.
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