Forex Guide

FOREX is the biggest online financial market, and to use it to your advantage, it's best to know the most you can about it. If you are planning to start trading in FOREX, this is the page to read. With a brief explanation about FOREX, how trading goes, the FOREX markets, and why it's a great option to do financial trading. Also, as a bonus, you're going to find a glossary with common terms used in FOREX that may be foreign to you if you're not familiar with the Market.

 

What is Forex?

FOREX (or FX, as it's also commonly known) stands for Foreign Exchange. FOREX is a financial trading market, in which you buy one currency while selling another simultaneously. It's the world's most traded market, operating 24 hours a day from Sunday 5 PM ET to Friday 5 PM ET. This versatility helps FOREX be largest and most liquid financial market in the world. Out of all the trading happening in FOREX, about 95% is speculative trading, which means that only about 5% of the trading that goes on at FX represents actual Government-related and Company-related conversion needs. The biggest difference between trading in FOREX and trading in a regular stock market is that trading involves directly the two counterparts (an Over-the-Counter market), and the Internet has made this easier, making FOREX so popular. Unlike other financial markets, investors can respond immediately to currency fluctuations, whenever they happen.

 

Forex Trading

Foreign Exchange is the simultaneous buying of one currency and selling of another. About 85% of all FOREX transactions involve the world's major currency pairs: US Dollar, Euro, Japanese Yen, British Pound, Canadian Dollar, Australian dollar, and Swiss Franc. All currencies are traded in pairs (EUR/USD for Euros/US Dollar, USD/JPY for US Dollar/Japanese Yen, etc). Usually the US currency is the base currency and quotes are given in $1 USD per counter currency. The exceptions are the British Pound, the Euro and the Australian Dollar. One of FX's biggest difference when it comes to trading, is that it's not centralized on a physical location or an exchange, as with the stock and futures markets. The main centres for trading are Sydney, Tokyo, London, Frankfurt and New York, and this worldwide distribution of trading centers is what makes gives FOREX the possibility to be a 24-hour market.

 

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The Forex Markets

There are three different ways to trade with FOREX. You can trade via the SPOT market, which is the largest and the place where most FOREX transactions happen. Basically, this is where currencies are bought and sold according to the current price. You should take into consideration though that even when the spot market is referred as one market that deals with present transactions (rather than future ones), it usually takes two days for these transactions to be settled. The other two market options to trade in FOREX are the Forward and Futures Markets. The currencies per-se are not traded in these markets, but they deal with contracts in which they set conditions for a certain currency type, a specific price, and a future date in which the arrangement will be settled. The difference between the Forwards market and the Futures market is that in the Forwards market, the contracts' terms of arrangement are settled between the two parties involved. In the Futures market, contracts are bought and sold based upon a standard size and settlement date on public commodities markets.

 

The Advantages of Forex

* Zero Commissions Unlike trading in the other financial markets, FOREX is usually traded without commissions, which means you get 100% of the trade. This is a great plus if you are an investor and wish to use FOREX for everyday trading. * Liquid Market As we mentioned earlier, FOREX is the largest and most liquid market in the world, with daily volume of currencies traded exceeding US$ 3 trillion. This is way larger than all the US equities and financial markets combined. * 24-hour Market Trading starts in Sydney, and as the business day starts in other places around the globe, it moves along, first to Tokyo, London, and New York, from Sunday 5 PM ET to Friday 5 PM ET. * Profit Possibilities The market is constantly moving and it's extremely versatile. Since the trading opportunities are always there, it's fairly easy to make a profit by trading the right currencies at the right time. * Accessibility FOREX used to be accessible only to government central banks and investment banks, but the Internet has made it accessible to private investors. Not only everyone with a computer/internet access can access it, you can trade also a great range of currencies.

 

Quoting and Trading Process

Just like any other financial market, FOREX quotes consist of two sides: BID, which is the price you sell base currency at, and ASK, which is the price you buy base currency at. Since FOREX is an extremely liquid market, prices are quoted in tiny increments called pips (Percentage In Point), which usually refers to the fourth decimal point out (0.0001), or 1/100th of 1%. For Japanese Yen, pips refer to the second decimal point (0.01). Most currencies trade within a range of 100 to 150 pips a day. The difference between the BID and the ASK prices is called Spread. Although these movements may seem insignificant, even the smallest point change can result in thousands of dollars being made or lost due to leverage. Leverage trading, or trading on margin, means you aren't required to put up the full value of the position. In FOREX, you have a higher leverage level than stocks, 200 times the value of your account. An increased leverage, though, increases your risk.

 

GLOSSARY

Here are some of the most common terms and actions used in FX, Check our Forex Glossary