What is FOREX?
The Foreign Exchange Market (Forex) is the arena in which a nation's currency is exchanged for that of another at a mutually agreed rate. It was created in the 1970's when international trade transitioned from fixed to floating exchange rates, and is now considered to be the largest financial market in the world because of its huge turnover.
Introduction to Forex
All currencies are traded in pairs and each is assigned with an abbreviation. Here are some of them (Table 1):EUR Euro
USD US Dollar
GBP British Pound
JPY Japanese Yen
CHF Swiss Franc
AUD Australian Dollar
CAD Canadian Dollar
NZD New Zealand Dollar
SGD Singapore Dollar
'Base' currency is the first currency in the pair. 'Quote' currency, or 'term' currency is the second currency in the pair.USD / JPY = 120.25
Base currency Quote currency Rate
This abbreviation specifies how much you have to pay in the quote currency to obtain one unit of the base currency (in this example, 120.25 Japanese Yen for one US Dollar). The minimum rate fluctuation is called a point or a pip.
Most currencies, except USD/JPY, EUR/JPY, CHF/JPY and GBP/JPY where a pip is 0.01, have 4 digits after the period (a pip is 0.0001), and sometimes they are abbreviated to the last two digits. For example, if EURUSD is traded at 1.2389/1.2391 the quote may be abbreviated to 89/91.
The currency pairs on Forex are quoted as the Bid and Ask (or Offer) prices: Bid Ask
USD / JPY = 120.25 / 120.28
Bid is the rate at which you can sell the base currency, in our case it's the US dollar, and buy the quote currency, i.e the Japanese Yen.
Ask ( or Offer) is the rate at which you can buy the base currency, in our case the US dollar, and sell the quote currency, i.e. the Japanese Yen.
Spread is the difference between the Bid price and the Ask price.
Pip is the smallest price increment a currency can make. Also known as a point. e.g. 1 pip = 0.0001 for EUR/USD, and 0.01 for USD/JPY.
Currency Rate is the value of one currency expressed in terms of another. The rate fluctuation depends on numerous factors including the supply and demand on the market and/or open market operations by a government or by a central bank.
