Forex, an acronym for foreign exchange, is as simple as trading one currency against another. And while you might be interested in joining the forex market learning all there is to know about forex trading in a short article is impossible; however a basic introduction is what you need to give you a basic understanding and get you going. However, even if you are a novice you have probably been involved in forex before if you have ever exchanged money in a foreign country or even engaged in business internationally. This is forex trading at its most elementary level and concentrated forex trading is when you invest money to make money on the trading of currencies.
If you don’t know much about forex then you probably are unaware of exchange rates, spot markets, currency pair, and other similar terms that apply to foreign exchange. However, when you finish reading you will have a basic understanding of Forex as well as the terms associated with it.
What is Foreign Exchange?
Foreign exchange occurs when you buy and sell currencies at the same time. This simultaneous transaction occurs in the foreign exchange market that is made up by foreign banks and other institutions or participants that take place in the buying and selling of currencies. There is no exchange in foreign exchange so it is considered OTC or over the counter transactions. Transactions can occur quickly or be rolled over. The spot market is used for settlement of trades within two business days and rollover occurs when open transactions are “rolled over” to the next value date.
The currencies also have their own set of terms that apply to them. The first currency in a transaction is called the base currency and the second currency is known as the counter or terms currency.
Each currency has an abbreviation that is used for trading. For example, the US Dollar is USD while the Euro is simply Eur and the British Pound is the GBP. Each world currency has its own abbreviation so to be really successful in forex means you should learn the abbreviations of all currencies. Also, there are nicknames that apply to currency pairs. For example, the USD/CHF is called the “swissy” and the GBP/USD is called “sterling” or “cable.”
Once you begin trading foreign currencies you will need a broker, or someone to connect you with other buyers and sellers. Generally, your broker will charge you a per transaction fee or simply take a commission on your earnings. Of course, some individuals who have a lot of experience in foreign exchange choose to act as their own brokers. However, if you are just getting started a broker can really help you learn the ropes and be as successful as possible.
Buying and Selling
To engage in buying and selling of Forex you will need to understand the abbreviations and what they stand for as well as how to find the prices, values, pips, and selling points.
The sell quote is the amount of money you are able to sell the currency for and is also called the bid price. It is always displayed on the left as a fraction like 1.32000/03 for CHF/USD quotes or other currencies. This simply means you can sell CHF for $1.32 US dollars.
On the other side is the buy quote, known as the offer price or ask price. It is located on the opposite side as the sale quote and is the price that you are able to purchase the base currency for. Knowing the price to buy a currency for is the same as the way the sell quote is displayed. So, if you have 1.32000/03 for CHF/USD you can buy CHF for $1.32 US dollars.
The difference between the sell and buy quote is known as the spread. The spread is easy to calculate once you learn to do so. If the CHF/USD is 1.32000/3 then the spread is 1.32 minus 1.3203, or in forex terms 3 pips.
Another important term in Forex is the pip. The pip, short for price interest point, stands for price increments that are allowable among currencies. Each pair of currencies has a minimum allowable pip. For example, the USD/JPY minimum pip is 0.01. The pip value is also important to understand and is simply the value of a pip. However, this can get a bit complicated and should be researched for thorough understanding. The pip value is fixed in regards to most US dollar transactions at $10 for 100k unit lots. A lot simply being the standard size of a transaction. Usually, base currency lots are measured at a standard of 100,000 units and mini lots are measured at a standard of 10,000 units. However, pip value is not always the same and research and studying the pip values is really important to fully understand how these work.
Trading foreign exchange can be really profitable if you know what you are doing and completely understand the terms and process. However if you jump into foreign exchange without any knowledge of the process and how things work you might be setting yourself up for some serious losses. So, the brief review here should enlighten you a bit and help you continue your research on forex investing. Once you feel more or less knowledgeable all you need to do is find a broker or online programs that will help you get started trading foreign exchange. Remember, at first you might want to take it slow and be conservative while you are learning the ropes, but in the end the amount of risk you want to take is up to you.