Basics of Forex Trading

Basics of Forex trading

Foreign exchange, abbreviated as FOREX, in itself, constitutes the largest financial market in the world. The trading of this foreign Exchange is called forex trading. In the process of forex trading you have to understand the terms related to it such as Exchange rate and Forex quotes, meaning thereby, the value of one currency expressed in terms of another. Foreign exchange refers to the foreign currency, which can be used in the international settlement payment means. Foreign Exchange Market is referred to as a transaction place for buying and selling foreign currency.

For any investor who wants to trade in foreign exchange along with above basic terms it is advisable that he gets familiar with some other terms including Spot Market, which means transactions at the current market rate for settlement within two business days (the value date). Next is Market Maker who is a dealer willing to make a market in a currency pair, by providing liquidity and displaying a two-way price quote. A market maker takes the opposite side of your trade. Another term that is very important is PIP, which means Price Increase Point, the smallest price increment a currency can make. It is also known as points. Yet another term, Leverage is the amount of gearing you can get from your investment expressed in terms of a ratio. e.g. 100:1 leverage implies a 1% margin requirement.

 While placing any order in forex market some other terms also exist, such as Limit Entry Order, which is an order to buy below the market or sell above the market at a pre-specified level, believing that the price will reverse direction at that point. Next being the Sell Quote which is the quote given on the left. It is the price at which you can sell currency to the dealer.  Buy Quote the quote given on the right is the price at which you can buy currency from the dealer.

In the process of forex trading the Forex market does not have a fixed exchange unlike many other financial securities. It is primarily traded through banks, brokers, dealers, financial institutions and private individuals. Trades are executed through phone and these days through the Internet. It is only in the last few years that the smaller investors have been able to gain access to this market. Previously the large amounts of deposits required precluded the smaller investors. With the advent of the Internet and growing competition, forex trading is now easily within the reach of most investors.