Forex trading or Foreign
Exchange Trading refers to the simultaneous trading—that is,
buying and selling-of two different currencies. It is done
between and among major financial institutions, central banks,
retail currency traders or speculators, large international
companies, government institutions, companies with overseas
operations and the like.
The Forex Market operates 24
hours through a global electronic network where trading occurs
over the telephone and computer networks.
The Top Forex Currencies
Each world currency is given a
three letter code which is used in FOREX quotes, the instrument
traded by Forex traders and investors are currency pairs. A
currency pair is the exchange rate of one currency over another.
The most traded currency pairs are:
EUR/USD, GBP/USD, USD/CAD,
USD/JPY, USD/CHF, AUD/USD.
Trade happens when you accept
the offered price and when the dealer confirms.
A currency can never be traded
by itself. So you can not ever trade a EUR by itself. You always
need to compare one currency with another currency to make a
Lets have the EUR/USD and
AUD/USD for example.
So, for instance, if a trader
goes long or buys the Euro, she or he is simultaneously buying
the EUR and selling the USD. If the same trader goes short or
sells the Aussie, she or he is simultaneously selling the AUD
and buying the USD.
The first currency of each
currency pair is referred as the base currency, while second
currency is referred as the counter or quote currency. Each
currency pair is expressed in units of the counter currency
needed to get one unit of the base currency. If the price or
quote of the EUR/USD is 1.2545, it means that 1.2545 US dollars
are needed to get one EUR.
are no further costs in the trade. There are no commissions and
other fees as well.
All currency pairs are
commonly quoted with a bid and ask price. The bid is the price
your broker is willing to buy at, thus the trader should sell at
this price. The ask is the price your broker is willing to sell
at, thus the trader should buy at this price.
In contrast with other
financial markets where you require the full deposit of the
amount traded, in the Forex market you require only a margin
deposit. The rest will be granted by your broker.
The leverage provided by some
brokers goes up to 400:1. This means that you require only 1/400
or .25% in balance to open a position (plus the floating
gains/losses.) Most brokers offer 100:1, where every trader
requires 1% in balance to open a position.
The standard lot size in the
Forex market is $100,000 USD.
For instance, a trader wants
to get long one lot in USD/YEN and he or she is using 100:1
To open such position, he or
she requires 1% in balance or $1,000 USD.
Of course it is not advisable
to open a position with such limited funds in our trading
balance. If the trade goes against our trader, the position is
to be closed by the broker.
It’s very important to
understand every aspect of trading. Start first from the very
basic concepts, then move on to more complex issues such as
Forex trading systems, trading psychology, trade and risk manage