Forex Trading and Operational Terminology
Forex (Foreign Exchange) Market is the fast growing market of the world where trillions of dollars trades take place on daily basis. The participants of foreign exchange market consist of financial institutions including commercial banks, investment banks, central banks, investment management funds, forex brokers and investors or traders. Forex market is the most liquid and decentralized market of the world. Forex market is an over the counter (OTC) market where foreign currencies are traded that’s why it is also known as money market or currency market.
Forex trading has gained the popularity by the reason of high returns on the investment during a very short period of time that attracts to the investors. The participants of the market make buying and selling transactions on the basis of price movement of the currencies by speculating on the current or determined rate. The prices of the currencies on which these currencies are traded are determined by the supply and demand forces of the market. However, the trading price of a currency does not ascertain its relative value that depends on some other factors like economic policies, political stability etc. of the country concerned.
In the forex market currencies are traded in pairs that mean buying one currency and selling another currency concurrently at the same time. A currency pair comprises on two currencies i.e. base currency and counter or quoted currency. Based currency valued in terms of other currency by using the exchange rate. The base currency at all times equal to one.
In the case of currency pair EUR/USD = 1.2891.The first currency i.e. EUR is the base currency and other currency i.e. USD is the counter currency. The quote read as one (1) EUR is equal to USD 1.3651 or in other words, € 1 is worth of $ 1.2891. A trader needs to spend $ 1.2891 for buying the € 1.
The ask/bid price, pip and spread are the key terms that are used in the forex market. The Ask price is the price on which an investor agrees to buy a currency or it is the price on which the market or seller agrees to sell the currency to the investor. The Bid price is a price on which the investor sells a particular currency or the market/buyer agrees to pay for that currency to the seller.
Point in Percentage (PIP) represents a change in the price of a currency pair due to exchange rates. A pip denotes to a fourth decimal in the amount of a currency. One pip symbolizes as 0.0001. Normally, currency pairs make an exhibition of four decimal places while only in the case of the Japanese yen currency pair shows just two decimals. PIP sometimes also called Price Interest Point (PIP).
Forex spread is the transaction cost of a trading for the forex trader and the commission or service charges for a broker or the trading platform. It is the difference between the Bid and Asks price of a trading commodity or a currency pair.
The forex market offers high returns but it also confers greater risk exposures. There are numerous factors that contribute to the success in the forex trading e.g. choosing the right trading platform or broker, adopting the risk mitigation measures, investment diversification strategy and know-how of forex trading etc.