Back in the day, the foreign exchange (forex) market consisted of wealthy individuals, large companies and central banks, but now thanks to the Internet just about anybody can get their feet wet with forex trading.
Forex trading is the exchange of one currency for another. A trader’s aim is to make favorable trades with the changes of value of the currency they are currently trading by predicting how the prices will move in the future. The prices of currencies are always moving up or down mostly due to economics and political events.
The forex market is by far one of the biggest markets around the world. It’s popularity is mostly due to its gargantuan market size, the ability to leverage trades and the ease of conducting transactions. Buy and sell positions can be closed almost instantly usually without added charges like commissions or transaction fees.
Another reason for the popularity of forex trading lies in its availability. It is open 24 hours which means traders can choose to trade whenever they wish.
Traders will do well to remember some terminology that characterizes forex transactions. If you have dealt with stock trading before it won’t take much for you to remember the basic terms.
A pip is the smallest price change that any currency can make. A good example is the Japanese yen which is priced at two decimal points. 1 pip equals 0.01 yen.
In the forex market the value of a currency is determined by comparing it to another currency. These are the currency pairs. Traders call the first currency in the pair the base currency while the second one is called quote currency.
The Base Currency is the first currency in the pair. The quote currency is the second and is also known as the counter currency.
How Forex is Traded
Forex trading is mostly just like any other form of trading in other market. The only difference is that forex involves buying a currency and selling another simultaneously which is why currency pairs exist. The exchange rate is the purchase price between the two currencies in a pair.
For example, the USD/JPY pair shows how many yens each dollar can buy. If a trader feels the yen will strengthen against the dollar, he should buy yen. If it’s the opposite, it is recommended selling the yen.