What is Forex Currency Trading?
The foreign exchange currency market is where forex trading takes place and is the largest financial market in the world with daily average volume in excess of 2.1 trillion. Currency traders buy and sell various currency pairs with the intent of profiting from a favorable change in value of a currency pair. The foreign exchange currency market is driven by world events and especially economic news releases.
Forex Basics:
The foreign exchange currency market is not limited to a physical location like stock markets are. In fact, the foreign exchange currency market is substantially bigger than all the world’s stock markets combined. Forex trading can be done over the phone or internet. The great majority of forex trading takes places in major cities in the countries of the U.S., England, Australia, Japan, and Germany.
The first currency in a currency pair is known as the base currency, the second currency is known as the quote currency, counter currency, or terms currency. Forex rates are quoted per unit of the base currency, as an example, the exchange rate between the U.S. dollar and the euro will be indentified as EUR/USD, so the number will be the amount of U.S. dollars that can be exchanged for one euro.
Currently the euro has first precedence as base currency, this means all the currency pairs involving the euro should have it as the base currency. The hierarchy for base currency is as follows: Euro, Pound Sterling, Australian Dollar, New Zeeland Dollar, United States Dollar, Canadian Dollar, Swiss Franc, and Japanese Yen.
How Forex trading works:
In the foreign exchange currency market quotes include a bid and an ask price. The bid is the price to sell the base currency in exchange of the counter currency. The ask is the price to buy the base currency in exchange of the counter currency. In forex, we call the difference between the bid and ask price the spread. Forex brokers act as market-makers; they provide a place where market participants can buy and sell currencies. Rather than charging a commission on each trade like stock brokers do, forex brokers instead collect the spread on the currency pair being traded.
Currency pair movement is usually expressed in terms of pips. Pip is the term for incremental change of a currency pair. For example, if you see the current price of GBP/USD (British pound/U.S. dollar) quoted as 1.6832(bid)/1.6837(ask), then the spread of this currency pair is 5 pips, because the difference between the two is .0005. So for the GBP/USD currency pair one pip; the smallest incremental change for that pair would be equal to .0001.
Forex trading can be quite volatile due to the multitude of big money players that trade this market. Volatility in the forex market can truly be a double edged sword; abuse it and watch your trading account shrink really fast, properly utilize it and it will reward you. Make sure you understand the many intricacies of price action before jumping into the market head first.