A lot of people have probably heard the term ‘forex’, but they do not understand what it means. It has grown in popularity and now represents the biggest and most liquid financial market in the world with daily turnover of over $5 Trillion per day. The expansion of the internet has made access to the forex market easier than ever and thousands of new traders enter the market every day.
All that is required to start trading in the global forex market, which is open for trading 24/5, is a stable internet connection, preferably your own computer and a reliable forex broker who gives you access to the market and allows you to execute your orders and strategy you feel comfortable with. This explains the respectable growth in the forex market which expands daily.
What is forex?
Forex or foreign exchange is the financial market which trades in international currencies. The forex market determines the values of currencies around the world. Traders from all over the world buy and sell currencies or currency pairs. There are plenty of currency pairs available and the forex market moves constantly based on supply and demand.
The most used aspect of forex trading is speculation of price movements in order to generate profits. Big financial institutions as well as new retail traders who trade from home are active in the forex market and try to generate profits for their clients and themselves.
One of the most appealing factors for forex trading, besides its high liquidity, is the small amount of capital requirements and the potential for profits in relation to the investment. A usual forex account is leveraged which means the capital needed in order to execute a big trade can be very small. Some accounts are leveraged up to 500 times or even 1,000. An account that is leveraged 500 times means that the trader needs to pay $1 for every $500 traded.
Leverage is probably the best tool for traders, but traders need to understand how to use the tool otherwise it can cause heavy losses to the portfolio and far exceed the traded amount. The biggest advantage leverage gives traders is the ability to trade large amounts of money and profit from them. For example a trader has $100 to use for trading purposes and in a normal non-leveraged account the trade can place trades for $100. An account which is leveraged 500 times would allow the trader to place forex trades worth $50,000 with the $100. Using leverage can be very risky if traders do not understand how to use it properly and have poor money as well as risk management procedures in place.
Forex pairs are traded in lots. One standard lot represents 100,000 units, while a lot of forex brokers define one lot as 10,000 currency units. You can compare one unit as one share in a public traded company. In other words if you execute a buy order for one lot you are purchasing 10,000 currency units.
Forex price movements are defined as pips. One pip is the smallest price move on a classical four digit account. For example if the EURUSD forex pair trades at 1.3450 and the price moves one pip higher the new price would be 1.3451. On five digit account the smallest price movement possible is called a pipette and represents one-tenth of a pip. Ten pipettes equals one pip.
What is forex?
Forex stands for foreign exchange and allows traders from all over the world to speculate on currencies through buy and sell orders. Forex determines the exchange rates of currencies and allows traders to profit from price movements. It is the biggest and most liquid financial market in the world and is open for business 24 hours a day except for weekends.