The foreign exchange market (Forex, FX, or currency market) is a global decentralized market for the trading of currencies. In terms of volume of trading, it is by far the largest market in the world with the largest international banks being the main participants. Financial centres around the world serve as the anchors for trading between a wide range of multiple types of buyers and sellers 24/5. The foreign exchange market determines the relative values of different currencies.
Working through financial institutions, the market operates on several levels. Behind the scenes, banks turn to a smaller number of financial firms known as “dealers/brokers” who are actively involved in large-scale foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the-scenes market is sometimes called the “interbank market”, although a few insurance companies and other kinds of financial firms are also involved. Trades between foreign exchange dealers can be very large, involving hundreds of millions of dollars. Because of the sovereign risk that arises when two national currencies are involved, Forex has little (if any) supervisory entity regulating its actions.
Superior Liquidity: Liquidity is what really makes the foreign exchange market (or Forex) stand out from other markets. There are over 15 foreign exchange markets, which are by far the most liquid financial markets, dealing about one trillion U.S. dollars on a daily basis. This ensures better trade execution and allows traders to easily open and close a transaction. The superior liquidity also makes it possible to focus on only a few instruments as principal investments.
24-hour Market: One of the biggest advantages of Forex market transactions is that they are decentralized. The Forex market operates in financial centers across the globe, starting a trading day in Australia and following the sun through Hong Kong, Frankfurt, London and ending in New York.
Leverage: With the help of leverage Forex market trading provides much greater purchasing power than many other markets.
For example, a trader uses 1:100 leverage, which means that only a deposit of 1,000 USD is required to open a 100,000 USD trade.
Low Transaction Costs: These costs vary from broker to broker, but they are usually relatively low . The most common costs associated with trading are the spread and commission fees charged by the broker for each trade.
Low Minimum Investment: Forex requires less capital to start trading than any other financial market. You can start well with up to 300 USD as a low initial investment, depending on the leverage provided by the broker. This is a great advantage, allowing to keep the investors’ own capital to the lowest level.
Trade online: If you travel a lot, you can trade online from anywhere in the world.
Prices are set as a result of a variety of operations made between different counterparties: banks, financial and insurance companies, investment funds and private investors.
Financial trading involves the buying and selling of financial instruments for different periods of time, usually for medium and short term.
A trader is a person or entity who buys and sells financial instruments such as currencies, stocks, bonds, commodities, derivatives etc. in order to gain financial benefit from the price change.
The most traded currency pairs in the world are called the Majors, such as EUR/USD, GBP/USD, USD/JPY, USD/CHF, etc. They involve the following currencies: euro, US dollar, Japanese yen, pound sterling, Australian dollar, Canadian dollar, and the Swiss franc.
A lot is a transaction unit on the market. One standard lot contains 100,000 units of base currency. For example, one standard lot of EUR/USD equals 100,000 EUR. Please note that on Cent accounts you trade cent lots, where one cent lot equals 1,000 units of base currency. The minimum lot which can be opened on the MetaTrader4 platform is 0.01.
This is a fee that the client has to pay to keep a position open overnight. From Wednesday to Thursday swaps are calculated in triple size (for the weekend).
This is the price specified in the order.
This is the amount of money on a trading account that can be used for opening new positions or supporting existing ones.
This is the minimum allowable price change. For example, a price change from 1.3450 to 1.3455 is a change by 5 pips.
Here is an example: After careful analysis a trader decides to buy EUR/JPY and makes an order at a price of 131.57 (Ask) for the amount of 400,000 EUR. Let us assume that he was right in his prediction, and after a while the quote for EUR/JPY rises to the level of 132.16, at which point the trader decides to fully close the position by selling 400,000 EUR.
The financial result of this operation will be as follows:
132.16 (closing price) — 131.57 (opening price ) = 0.59 or 59 pips (we get the difference in pips).
In order to calculate the profit we have to multiply the pip difference by the volume of the order:
0.59 x 400,000 = 236,000 — the result in the quote currency, i.e. JPY (Japanese Yen).
It remains to convert the results into the trading account currency. Let’s assume that the trader has an account in USD. Suppose that at the moment of order closure the dollar against the yen (USD/JPY) was 107.19 (Bid) / 107.24 (Ask). To get those dollars one has to buy USD/JPY, i.e. to buy them at the Ask price — 107.24.
So the profit calculated in US dollars will be:
236,000 / 107.24 = 2200.67 USD.