Forex, often referred as foreign exchange or simply FX, is a type of trading that deals in the buying and selling of the world’s currencies. The forex exchange market is a huge trading industry with an estimated three trillion dollars exchanged every day. Forex exchange is unlike the more popular stock market. Forex does not have a central exchange location like the stock market. Instead, forex is a trade between two private entities.
When a trade is performed in the forex market, you purchase one currency while selling another. For instance, a person in the US with dollars can sell those dollars and purchase Euros. The two trade entities are called a cross. In this example, the cross is USD/EUR. The most popular crosses are between Dollars, Euros, Yen, and the British Pound.
The margin is the revenue in your account in which you can use for trading. The starting margin is dependent on the amount of money deposited into the trading account. For most trading platforms, users can begin trading forex with as little as $250.00. The margin is not a 1:1 ratio of funds, rather a margin ratio is normally set to 100:1. This means that with a 1% margin on $1,000, the user can trade with up to $100,000.
The spread is the gap between the price in which you can sell currency and the price in which you can buy more currency. The spread determines if your initial buy will cost or make money in the exchange. When trading forex, there is usually a 3 pip cost for each trade.
Pips are the unit of trade in the forex exchange industry. When making a trade, there is usually a 3 pip cost. For instance, if the asking price is .9638 then the actual bid price is .9635. A pip is converted into dollars depending on the trade. For instance, a 100,000 contract with a cross of USD/EUR is equal to $10USD.
Advantages of Forex
Forex is relatively inexpensive to start, but there is a large learning curve. Forex is a 24-hour a day industry, so you can trade day and night. Some people choose to become day traders using forex. You can even choose to trade on your own, meaning there are no commission costs to you.
Even though forex is easy to begin, it’s recommended that users read and study the terminology and tricks of the trade. You may even prefer trading with a broker like CMC Markets to help get you started in forex.