What is Forex?
The Foreign Exchange (FX) market is the place where currencies are traded. It is considered to be the largest financial market place in the world and can be traded 24 hrs a day during a typical working week (Mon-Fri). It is not one single entity but a connection of banks, investment firms, brokers and hedge funds etc across the globe.
With Foreign Exchange, or FX for short, currencies are traded against one another. A typical transaction invloves buying one currency and paying for it with another currency. Thus, when trading currencies in FX you will see them quoted in pairs. For example, EUR/USD is the price of the euro expressed in US dollars. Eg: EUR/USD @ 1.3375. Means 1 EURO =1.3375 USD
Some other useful Forex terms and facts:
The Base Currency: the first currency in pair. The EUR in EUR/USD.
The Quote Currency: the second currency in pair. The USD in EUR/USD.
Long: Buying one unit of Base currency and pay for it in Quote currency.
Eg: ‘Long EUR/USD’= you are buying EUR and paying for it in USD.
Short: Selling one unit of Base currency and receive pay for it in Quote currency.
Eg: ‘Short EUR/USD’= you are selling EUR and receiving payment for this in USD.
You always pay and receive payment in the Quote (second) currency.
Cross Pairs: Those pairs that do not have the USD in them. Eg: AUD/JPY
Trading: Trading the EUR/USD: Example: EUR/USD = 1.3375. This means:
• If you buy 1 EURO you will need to pay 1.3375 USD.
• If you sell 1 EURO you will receive 1.3375 USD. (No spread factored in).
Bid Price: the price the market maker will pay you for a security. You sell to the market maker at the ‘bid’ price.
Ask Price: the price the market maker will offer to sell you a security for. You buy from the market maker at the ‘ask’ price.
Example of bid / ask:
If the AUD/USD currency pair is currently trading at 1.0320/1.0325, that is another way of saying that the ‘bid’ for the AUD/USD is 1.0320 and the ‘ask’ is 1.0325. This means you can sell 1 AUD and get paid 1.0320 USD for it. Or you can buy 1 AUD and pay 1.0325 USD for it.
Spread: The difference between the bid and ask price. This is usually due to the broker’s fee!
Spread Size: A large spread is often a sign of low liquidity (volume).
PIPs: Percentage in Point = Pip. A pip is the smallest move a currency pair can make. Most pairs are traded to 4 decimal places thus 1 pip usually = 0.0001.
Exception: Yen pairs USD/JPY 1 pip= 0.01