Introduction And Overview Of Forex Trading
By Gregory Marathonge
Forex involves the trading of currencies. It is the largest financial market in the world and has an estimated daily turnover of 1.9 trillion dollars. This turnover is larger than all the worlds’ stock market on any given day.
The market does not have a fixed exchange. The market is considered an over-the-counter (OTC) market. The market is completely electronic and trades are executed over the phone or on the Internet. Until 10 years ago the market was the preserve of large financial institutions. Now an ever-increasing amount of individual traders thanks to the advent of the Internet and an increasing amount of online brokers are trading forex.
Currencies are always traded in pairs. A typical pair would be EUR/USD (Euro over US dollars). The first currency is the base. The second currency is the counter currency. The pair can be viewed, as the amount of the secondary currency that is needed to buy 1 unit of the first currency. If you were to buy the above pair you would buy Euro and simultaneously selling US dollars. If the pair were sold the reverse would happen you would sell the Euro and buy the US dollar. This might sound confusing but simply think of the pair as one item and you are buying or selling one item. If you think the Euro will go up against the US dollar you buy the EUR/USD pair. If you think the EUR will decrease against the US dollar you sell the EUR/USD pair.
When you see quotes you will see two numbers. If we use the EUR/USD as an example you might see 1.2350/1.2355 the first number 1.2350 is the bid price and is the price traders are prepared to buy euros against the US dollar. The second number 1.2355 is the offer price and is the price traders are prepared to sell the EURO against the US dollar. The difference between the bid and the offer price is the called the spread. The spread for the major currencies is usually 3 to 5 pips (explained later).
The most common increment of currencies is the pip. If the EUR/USD moves from 1.2350 to 1.2351 that is one pip. A pip is the last decimal point of quotation. Most currencies are quoted to 4 decimal points. The exception is the Yen, which is quoted to 2 decimal points eg 139.41. The term pip is just lingo so if a trader says the EURO has gone up 20 pips against the US dollar add 0.0020 to decimal part of EUR/USD pair.
Forex is traditionally traded in lots also referred to as contracts. The standard size for a lot is $100,000. In the last few years a mini lot size of 10,000 dollars has been introduced and this has become increasing popular. trading is leveraged with most brokers offering 1% margins. This means you can control one standard lot of $100000 with $1000. Typically you would need a minium of $2500 to open a standard size account.
A mini account can be opened with $300 with most brokers. To trade a one mini lot you need a margin of $100, which in turn controls $10000 of currency. If the currency goes up 1% and if you traded one mini lot of $10000 you would make $100 dollars or 100% of your original margin. trading is a very lucrative market to get into and it is suggested that traders new to trading trade a mini account for an extended amount of time. Trading a mini account is a low cost entry to the market, as only $300
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is required to open an account. You can still make money while you become more experienced in trading. You can trade one mini lot until you have made your first $100 dollars then start trading 2 mini lots. As you gain more experience you can trade standard sized lots.
Forex trading is becoming increasing popular with traders of other financial products. It can be traded in amounts a lot smaller than other financial products, which makes learning trading safer than other markets. trading can be a very lucrative market, which no trader can dismiss.
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