Introduction to Forex
“Forex” stands for foreign exchange; it’s also known as FX. In a forex trade, you buy one currency while simultaneously selling another – that is, you’re exchanging the sold currency for the one you’re buying.
Forex market is the biggest and highly volatile financial market in the world. Initially forex market was used only by commercial banks, central banks & companies involved with high amount of import and export to protect themselves from currency risk & earning potential. Now it is no longer a corporate forex market, retail traders are growing at very fast rate in the last few years. It is highly liquid and leveraged market where you don’t have to wait to liquidate your position; it can be done with a click of mouse because the market is open for 24 X 5 with a large number of buyers & sellers to trade in currency pairs. Forex market gives you a unique advantage of high leverage; it means you multiply the profit and loss capability several times as compared to your investment in a trade. Forex spot market volume is 40% of total daily volume of around $ 5 trillion, it is traded on the OTC (over the counter) it doesn’t require any exchange to trade forex, it can be traded online from anywhere in the world but forex future mainly used by hedgers and commercial banks, are traded on specific exchanges.
Trading in forex market done with the help of currency pairs, buying one currency & selling another at a specified rate, the settlement (physical exchange of currency) of the transaction happens in T+2 i.e. today’s transaction will be settled after 2 days with some exceptions.
Example GBP/USD – 1.5540/1.5542 You buy 1 lot of GBP @ ask price 1.5542 and selling 1 lot of USD at the same time, physical exchange of currency would happen after 2 days. Left side currency (GBP) is called the base currency and right side currency (USD) is called the quote currency. Currency value is always quoted in comparison of base currency like 1 GBP is 1.5542 USD means you buy 1.5542 US $
with 1 Great Britain Pound.
Left hand side price is called bid or sell price (1.5540) and right hand side price is called ask or buying price (1.5542). Ask price is always higher than the bid price. Currencies are always bought at the ask price and sold at the bid price. The difference between the ask and bid price is called spread and broker earns profit from these spreads.
If an open transaction doesn’t close the same day then you have to pay or receive swap/carry over charges, swap charges depend upon interest rate of two countries, if you buy the currency pair whose interest rate is higher than the other one then you are going to receive positive swap charges and reverse happens in case of buying currency interest rate is lower to selling one.
Currency trading happens through a broker. You have to select a broker, if you want to trade in a forex market. The broker would provide you a trading platform through which you can trade currency by opening a trading account with the broker by depositing money. As the forex market is highly risky and volatile market and in order to understand the market before investing your hard earned money. Broker would provide you a demo trading platform that gives you an opportunity to master your skills and strategies with the live market; the only difference is that you are using virtual money instead of real money.
Conclusion
Being a beginner you should fully understand the pros and cons of the market, the more you read & apply the more chances that you will succeed in the market.
Quoting
Quate is the current bid-offer prices for currency pairs in the Foreign Exchange Market.