FOREX - In Detail
Currency Pair, pips, brokers

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Forex Market. Forex is the short form for foreign exchange.Forex is more popular than ever because of the global trading opportunities availabe to the odinary person like you and me.Forex markets have grown over the past 20 years.The volume of transaction is 3.2 trillion US dollars a day, with no signal of slowing down.This spells opportunity for you as a forex tradre, and this is one of the best times to learn to trade and to start trading the enormously popular and potentially profitable Forex markets.

It is important to say, though, that as forextrading continues to gain popularity one of the underlying problems you may face is the idea that you must trade forex ' to the minute' (or day trade)- this drives you out of picture if you cant commit that kind of time, and it creates inevitable losses if you are ill-prepared for the demands of day trading.

This talk about having to day trade forex is wrong, that it is, in part, driven by brokers, who earn the difference in the spread on every trade, and who would naturally want the constant flow of spread profits.

Can you day trade forex?   Yes.

Do you have to?      Not at all.

With more companies coming on line to offer sevices related to forex, you must take a smart approach to trading currencies.There is a logical reason that the number of brokers offering forex trades has increased dramatically over the last few years, brokers are making money on your trade, whether you do or not.

This is not to blame brokers, but it is to point out what is a simple fact, if you the trader, do not take an educated approach to trading forex, you will loose your money.

It should also remind you that you need to know how to trade forex.You must have a complete trading method that helps you take advantage of every opportunity the market offers.

While forex presents exciting and profitable trading opportunities, it is very important that you learn how to trade currencies and that you have a trading plan that you can execute every day of  the week- no matter what happens in the markets.

Too many traders have jumped into the forex waters without proper planning or learning, and have drowned.Dont be one of them.

Instead, be one of the successful forex traders who have a solid trading method and execute their trading plan diligently to take money out of the market again and again.

Forex trading is done through maket makers (not through exchanges like stocks) that include major banks as well as small to large brokerage firms located around the world who collectively make a market on a 24 hours 5 day basis.The forex market is always open and is the largest financial network in the world.

Forex trading involves trading currency pairs such as the EUR /USD   pair(Euro/US dollar pair) where a buyer of this pair would actually be buying the Euro, and simultaneouly selling shart the US dollar.In this forex pair EUR/USD, the first currency is called the       'Base' currency and the second currency is called the 'Counter' currency.The Price for a forex pair is expressed in terms of the counter currency.

For example,the price of the EURUSD pair is expressed in US dollars(the counter currency) as 1.5860.This means that the base currency, the Euro in this case, equals USD 1.5860.The price of USD/JPY  pair is expressed in Japanese Yen as 106.70 because for this pair the Japanese Yen is the counter currency.This means that the base currency, the US dollar in this case ,equals 106.70 Japanese Yen.

Prices are expresses in pips, which are nothing more than the minimum increment that a currency pair price can change.For example if the EURUSD price changes from 1.5860 to 1.5861, the price is said to have gone up by 1 pip. Most major pairs are priced 4 decimals which is thw equivalent of 1/100th of one percent.The exception would be the Japanese Yen pair that only trades to 2 decimals.This is because there are usually over 100 yen to the dollar

Forex pair quotes are on a bid-ask basis.The bid is the price that the  market is willing to pay a seller at a point of time for a specefic currency pair.The ask is the price that the market is willing to sell to buyer at a point in time for a specefic currency pair.The difference between the bid and the ask is called the bid-ask spread.For example a typical EURUSD quote could be 1.5860 bid 1.5863 ask which is a spread of three pips.Since the spread is how the market makers are compensated, there is no commission when placing a trade.

Also, it is important to note that the spread will vary depending on market conditions. So the quote itself for any given forex pair is the bid-ask combiantion at a point in time based on the market driven floating exchange rate.The quotation lists the bid price first, then the ask price.For the EURUSD example above, the quote would be expressed simply as 1.5860/1.5863 or 1.5860/63.

Trading is done in lots, either 100,000 unit stndard or 10,000 unit mini lots.For example for a stndard lot purchase ,if the EURUSD quote was 1.5860/1.5863 then buying EURUSD pair means buying 100,000 Euros and selling short 158,630 US dollars.Therefore a standard lot in which the USD is the counter currency 1 pip will equal 10 USD (1USD for mini lot).For other major counter currency pairs 1 pip will range from 8 USD to 10 USD.

Forex dealers offer leverage as high as 100:1 and sometimes higher. A 100:1 leverage, 1 stndard lot pair in which the USD is the base currency would require 1000 USD margin (USD 100,000/100).If the account value falls below the margin requirement, the dealer will close out the trade automatically.