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The Foreign Exchange, also referred to as the "FOREX" or "Forex" or "FX" or "Spot FX" market is the largest financial market in the world, with a volume over $1.95 trillion (INR 45,00,000 Crores) a
day.
If you compare that to the 10,000 Crores a day volume that the BSE and NSE Stock Exchange trades, you see how giant the Foreign Exchange really is. It's actually more than three times the total amount of the US stocks and futures markets
combined!
Money is traded on the Foreign Exchange. Forex trading is the simultaneous buying of one currency and selling of another. Currencies are traded through a broker or dealer and are traded in pairs; for example: the Euro and the US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY).
Buying currency is like buying a share in a particular country. When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the country's
economy.
In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy compared to the other countries'
economies.
Unlike other financial markets like the New York Stock Exchange, the Forex spot market has neither a physical location nor a central exchange. The Forex market is considered an Over-the-Counter (OTC) or 'Interbank' market, due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour
period.
Until the late 1990's, only the "big guys" could play this game. The initial requirement was that you could trade only if you had about ten to fifty million bucks to start with. Forex was originally intended to be used by bankers and large institutions and not by "little guys". However, because of the rise of the Internet, online Forex trading firms like FXCM, Interbankfx are now able to offer trading accounts to 'retail' traders like
you.
Any currency backed by an existing nation can be traded at the larger brokers. The most popular currencies along with their symbols are shown below:
There are many benefits and advantages to trading Forex. Here are just a few reasons why so many people are choosing this market:
No commissions:
No clearing fees, no exchange fees, no government fees, no brokerage fees. Brokers are compensated for its services through the bid-ask spread.
No middlemen:
Spot currency trading does away with the middlemen and allows clients to interact directly with the market responsible for the pricing on a particular currency pair.
No fixed lot size:
In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5000 ounces. In spot Forex, you determine the lot size.
Low transaction cost:
The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under normal market conditions. At larger dealers, the spread could be as low as .07 percent.
A 24-hour market:
There is no waiting for the opening bell. From Sunday evening to Friday afternoon EST, the Forex market never sleeps.
No one can corner the market:
The forex market is so huge and has so many participants that no single entity, not even a central bank, can control the market price for an extended period of time.
Even interventions by mighty central banks are becoming increasingly ineffective and short-lived. Even a large USA's annual budget equals only $1.2trillion which pales in contrast to the daily volume of $1.9trillion per day of forex markets.
Leverage:
In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make extraordinary profits and at the same time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500 dollars, one could trade with $100,000 dollars and so on. But leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
High Liquidity:
Because the Forex Market is so humongous, it is also extremely liquid. This means that with a click of a mouse, under normal market conditions, you can instantaneously buy and sell at will. You are never "stuck" in a trade. You can even set your online trading platform to automatically close your position at your desired profit level (limit order), and/or close a trade if a trade is going against you (stop loss
order).
Free "Demo" Accounts, News, Charts, and Analysis:
Most online Forex brokers offer free 'Demo' accounts to practice trading, along with breaking Forex news and charting services. These are very valuable resources for "poor" traders who would like to hone their trading skills with 'virtual' money before opening a live trading account.
 The object of forex trading is to exchange one currency for another in the expectation that the price will change so that the currency you bought will
increase in value compared to the one you sold.
Currencies are always quoted in pairs, such as EUR/USD or USD/CHF. The reason they are quoted in pairs is because in every foreign exchange transaction you are simultanesouly buying one currency and selling another.
Here is an example of a foreign
exchange rate of the British pound versus the U.S. dollar:
GBP/USD = 1.7500
The currency to the left of the slash ("/") is called the base currency (in this example, the British pound) and the one on the right is called the quote currency or counter currency (in this example, the U.S.
dollar).
When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you have to pay 1.7500 U.S. dollar to buy 1 British pound.
When selling, the exchange rate tells you how many units of the quote
currency you get for selling one of the basis currency. In the example above, you will receive 1.7500 U.S. dollar when you sell 1 British pound.
The base currency is the "basis" for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency.
All Forex quotes include a two-way price, the bid and ask. The bid is always lower than the ask price. The bid is the price in which the dealer is willing to buy the base currency in exchange for the quote currency. This means the bid is the price in which you, the trader will sell. The ask is the price at which the dealer will sell the base currency in exchange for the quote currency. This means the ask is the price in which you, the trader will buy.
The difference between the bid and the ask price is popularly know as the spread.
 You believe that signals in the market are indicating that the British Pound will go up against the US Dollar. You open 1 lot ($100,000) for buying the Pound with a 1% margin at the price of 1.5000 and wait for the exchange rate to climb.
This means you now control $100,000 worth of British Pound with $1,000.
Your predictions come true and you decide to sell.
You close the position at 1.5050. You earn 50 pips or about $500. (A pip is the smallest price movement available in a currency).So for an initial capital investment of $1,000, you have made 50% return. Return equals your $500 profit divided by your $1,000 you risked to trade.
| Your Actions |
GBP |
USD |
Your Money
|
| A)You buy 100,000 pounds at the GBP/USD exchange rate of 1.5000 |
+100,000 |
-150,000 |
-$1000 |
| B)You blink for two seconds and the GBP/USD exchange rate rises to 1.5050
and you sell. |
-100,000 | +150,500 |
+$1500 |
C)You have earned a profit of $500.
|
|
|
+$500 |
The most common increment of currencies is the Pip. If the EUR/USD moves from 1.2250 to 1.2251, that is ONE PIP. A pip is the last decimal place of a quotation. The Pip is how you measure your profit or loss. As each currency has its own value, it is necessary to calculate the value of a pip for that particular currency.
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