• 04Nov

    What is Forex?

    Forex (The Foreign Exchange market) represents the biggest financial market in the world, where people are buying and selling currencies. Unlike many markets the Forex (FX) market is open twenty-four hours per day and has an estimated turnover of 4 trillion USD every single day (CME Group, FX Products 2012). That is the reason why the Forex market, with its huge trading volume, represents the largest asset class in the world. Moreover, the above makes the market very liquid and thus very desirable to trade. It is open for everyone: companies, banks, collective investment vehicles, and even for ordinary people. Forex has an Internet platform which allows anyone to register and start trading the currencies.

    Globally, operations on the Forex market started after the breakdown of the Bretton Woods system in 1971. That point in history also marked the beginning of floating exchange rate regimes in several countries. Over the years, the foreign exchange market has become the largest market in the world.

    Foreign currency exchange rate

    According to a publication of the National Futures Association (Chicago, 2010), foreign money exchange rates are what it costs to interchange one country’s currency for another country’s currency. For example, if one goes to Bangladesh on vacation, one will have to pay for his hotel, meals, admissions fees, souvenirs and other expenses in Bangladeshi Taka. Since his money is US dollars, he will have to use some of his dollars to buy Bangladeshi Taka (BDT). Assume he goes to his bank before he leaves and buys $100 worth of Bangladeshi Taka. If he gets 8,100 Bangladeshi Taka (BDT 8,100) for his $100, each dollar is worth 81 Bangladeshi Taka. This is the exchange rate for converting dollars to taka.

    The basics of the Forex market


    Forex means The Foreign Exchange market

    The currencies on the Forex market are always presented in parity (USD/EUR, GBP/JPY etc.), and upon every transaction, one currency is being sold, while the other one is being purchased. Actually, the profit is realized by predicting changes in the currency parities. Although it may sound very complicated, the forex trading is very simple and it doesn’t require any special knowledge. However, like every trading, it has its own risks, so if the traders are well informed, and if they have a good knowledge of economy, the chance for good results is certainly better.

    Purchasing or selling is always referred to by some basic currency. For example, if we are buying parity EUR/USD, it means that we are buying EURO and selling USD. Also if we are selling EUR/USD, we are actually selling EURO and buying USD. Generally, established parity reflects the relationship between two state economies.

    Unlike other stock markets, the Forex is not centralized and is unique because of:

    • Very high frequency of daily trading;
    • Liquidity;
    • Huge numbers and diversity of people that participate in trading;
    • Geographic dispersion;
    • Working time (from 11 PM Sunday to 10 PM Friday); and,
    • Many factors that  are determining the currency changes.

    PIP – Percentage in Point

    To understand Forex better, it  is also very important to understand what PIP is.  Percentage in Point, or PIP, is the smallest change of currency price which might be traded. For the majority of currencies PIP is 0.0001 or 1/100 cent (Japanese Yen is the most known exception). Perhaps it looks to you like it is a very small value, but actually the majority of currencies are traded with hundreds of thousands of dollars, so such scaled values are much more flexible. For 100 000 USD, PIP is 10 dollars. If a currency changes from 1.2110 to 1.2114, this means that the PIP is 4. Let’s assume that PIP has a value of 20 dollars. If it’s increased by 4 points and has a value of 20 $ (which are 200 000 real USD actually), it means that the profit is 80 dollars. That way of trading makes it much more exciting as people are trading on a generally stable market (although that depends on the traded currencies – EUR/USD is quite stable but some exotic currencies are not) with the money they don’t currently own. Even a small change in the parity can make them either rich or bankrupt.

    Where to start?

    By the late 1990’s, this type of trading was available only for big players. With developing of global networks and new technologies, the Forex has become the place of everyday trading where all kinds of people participate in the game. All you need is an Internet connection and some initial capital.

    Also, it is good to mention that if someone wants to trade on Forex and he doesn’t know how to trade, there is a special offer – a Forex demo account with 100 000 virtual dollars. Any individual can practice and advance his skills on Forex. This is a very good thing for those who don’t have any experience in the trading as they can learn how to trade, and they don’t have to lose their real money ;).

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