This post will accumulate the basic features of foreign exchange markets also known as Forex or FX. Let’s start from the definition: What is Forex? It’s a largest and most liquid market in the world where currencies are traded.
In other words, it’s a place where everyone can make money in different ways. For example, the most obvious way is to buy and sell currency or you can work in a big investment bank as a trader or software engineer.
24 hours Forex trading
The FOREX market is open 24 hours from 5pm EST on Sunday until 4pm EST Friday and it doesn’t have one central location. All participants conducted through electronic communication networks.
So as you can see as soon as one market is closes another one starts. This enables to all participants from all countries to trade online 24 hours a day.
Which currencies are traded?
The most popular and frequently traded currencies are listed in the table below. Each currency has it’s own ISO code/symbol and name.
The most traded pairs of currencies are called majors. Each pair has it’s own nickname which you can memorize to become a true member of FOREX community=)
The pairs that do not involve USD like EUR/JPY are called cross pairs or in this particular example can be also called euro cross.
A currency pair is splitted into two parts: base currency and quoted currency. For example, if you were looking at the fiber EUR/USD 1.1153 the EUR would be the base currency, USD would be quoted currency and all quotation means that one euro is exchanged for 1.1153 dollars.
Some precious metals are also quoted on currency market. Such metals has it’s own ISO code and they are always the base.
BID, ASK, spread and pips
The currencies are doubly rated with BID and ASK. Where at the BID rate the bank buys euro against dollar and at the ASK rate the bank sells euro against dollar. Let’s have a look at the example EUR/USD 1.3566/1.3568. As you can see the BID rate is equal to 1.3566 and ASK rate is equal to 1.3568. The difference between BID and ASK is called as spread.
Most major currency pairs are priced to four decimal places, but all pairs involving Yen are priced to two decimal places. So a pip is the smallest amount by which a currency rate can change. Assume for EUR/USD BID rate is equal to 1.3566, so the pip in this case would be equal to 0.0001.
One more point: normally the BID comes before ASK, but in UK ASK may come first.
Long and short positions
A long position is a term that describes a situation when investor buys a currency pair at a certain rate with a hope to sell it later with the higher rate. If that happens, the investor can benefit from the deal.
A short position describes slightly different situation when an investor borrows currency to sell at the highest rate with a hope that the price will go down. If that happens, the investor again buys the same currency at lower rate to return the loan and make profit.