About Forex - What is Forex?

Forex is the commonly used abbreviation for Forex Trading. This abbreviation is commonly and often used by investors and traders to describe trading activity in the market that is carried out by investors/traders & speculators.

In Forex one currency is traded in exchange for another currency when a trader expects that the currency they have bought will appreciate in value against the currency they have sold. For example if a trader is trading the EURUSD currency pair, then if the trader expects that EUR will appreciate in value against the USD, then the trader can buy EUR and when the value of the EUR goes up then the trader can close the trade transaction and make a profit from the transaction.

In Forex trading a forex trader can buy or sell a currency. A trader will buy a currency if they think the value of that currency is likely to appreciate in the future, the same way a trader stocks will buy a stock if they expect that the value of that stock will move up in the future. A Trader will sell a currency if they think the value of that currency is likely to depreciate in the future, the same way a stock trader will sell their stock at for example $20 if they expect the price to fall, instead of waiting for the price to fall & sell at $15. A stock trader who sells their stock early at $20 makes more money than the one who waits for the price to fall and then sell at $15. For this same reason a fx trader will sell a currency if they expect that the value of the currency is going to fall.

The Market is a global market which is decentralized and is carried out through a network of the big international banks; this network is commonly referred to as the interbank network. This interbank consists of banks which are in different locations. These interbank network is responsible for providing the exchange rates at any particular time to those traders & other market participants that want to buy or sell currencies. In Forex trading the exchange rate between 2 currencies is constantly changing and this exchange rate is denoted by what is known as a Forex Quote. In currencies are traded and transacted in pairs of two and the exchange rate is displayed as a Forex Quote. This currency quote is constantly changing and the interbank network will update automatically the current currency quote and traders can then trade these currencies at the current exchange rate.

For example the forex currency pair EURUSD which is the most popular/liked currency pair in Forex may be quoted at 1.3450 in the morning and by afternoon the exchange rate may have moved to 1.3500 and this new exchange rate will be the current forex quote that will be displayed by the interbank network. This will mean that the forex currency pair will have moved up 50 points and EUR will have appreciated by 50 points against the USD. A trader who had bought this currency pair in the morning can then close the trade transaction and make a profit on the 50 point appreciation of the currency EUR against the USD.

Forex Quotes

Because Forex currencies are traded and transacted in pairs of two, the currency pairs exchange rate is displayed using Forex Quotes. In the example above of the forex currency pair EURO being traded against the US Dollar the exchange rate is 1.3450. The currency EURO is denoted using the symbol EUR while US Dollar is denoted using the symbol USD, the forex currency pair is then denoted as the EURUSD, and the current exchange rate is quoted as 1.3450. This is the rate at which any trader wanting to trade this currency pair will trade and exchange the two currencies being traded.

Because the exchange rate of any currency pair is constantly changing it means that speculators and traders can take advantage of these currency rate movements to make profits by trading these exchange rate movements. The exchange rate of any currency pair will keep moving due to and because of demand supply. This is because there are many participants trading these currencies in the open currency exchange market & hence this means that the currency quotes will get determined by the current market forces. These market forces may be determined by factors like an increase in demand for a currency due to the economy of that currency improving may mean that the particular currency rises in value while a decrease in demand for a particular currency due to the economy of that currency doing badly may mean that the currency will depreciate in value.

Pips

In Forex the exchange rate moves are measured in points commonly known as Pips in the market. The pip is used to calculate the profit or loss that a Trader makes in a particular trade. For example if a fx trader makes a trade transaction which moves 50 pips in his direction, then the profit of the trader will be calculated as 50 pips. In the above example where EURUSD moved from 1.3450 to 1.3500, then the total pip movement is 50 pips and we can say the EURUSD currency pair has moved up by 50 pips.

Lots

In currencies are traded and transacted in units known as lots. The standard lot is made up of 100,000 units of currency. There is also the Mini lot which is made up of 10,000 units of currency and the Micro lot which is made up of 1,000 currency units.

For 1 standard lot/contract the profit calculation per 1 pip in terms of Dollars is - $10 dollars per 1 pip, for a mini lot/contract the profit in Dollars per 1 pip is - $1 per pip & for the micro lot/contract the profit in Dollars per 1 pip is - $0.10 per 1 pip. Hence, in the above example where the forex currency pair moved up by 50 pips if a forex trader was trading using one standard lot then their profit would be $10 multiplied by 50 pips which is $500 dollars.

Leverage

Because not a lot of traders can afford to trade 100,000 units of currency or 10,000 currency units, there leverage in Forex which means that forex traders can borrow money and use the borrowed money to make trades with. For example leverage of 100:1 means that a trader with capital of $10,000 can borrow upto 100 times using the 100:1 leverage ratio & henceforth after borrowing using this leverage the investor and trader will control a total of $10,000 multiplied by 100, which means a trader will have a sum total amount of $1,000,000 and they can hence trade 10 standard contracts of $100,000 units of currency. This leverage is what makes FX accessible to the retail traders because the traders can start with little capital of their own and use leverage to borrow the rest of equity required for trading. Money that the trader deposits is referred to as the trader's margin and a fx trader can continue borrowing money using this leverage ratio as long as they have the required margin in their trading account. This is why the traders must have the required account balance in their account to open the trade transactions they want to, for example a trader using leverage 100:1 must have more than $1,000 in their trading account to be able to open and trade using standard lots.

Study More Tutorials and Courses:

• Forex Accounts Types Explained
• How to Trade MA(Moving Average) Trend Identification Strategy
• How to Build Technical Indicator Strategy
• What's Straight Through Processing Forex Account Explained?
• Best Pairs for Trend Following Traded in the Market
• Gold Buy Sell Technical Indicators and XAUUSD Exit Indicators