Forex newcomers are often immersed in a vast amount of information and foreign terminology that may leave them overwhelmed. We're here to make sure that this doesn't happen. We give you a breakdown of the fundamental concepts of the forex industry and lay the groundwork for you; all you have to do is read up and prepare for your Forex Time to begin.
The foreign exchange market is a decentralised, over-the-counter (OTC) global market. The daily volume of the Forex market surpasses $4 trillion as day worldwide. To put this in perspective the daily volume traded on the New York stock exchange is $25 billion making it the largest financial market in the world. The total Forex volume is well over three times the total amount of the stocks and futures markets combined.
The participants of the Forex market include banks, corporations, institutional investors, hedge funds and individuals. In simple terms Forex trading is where you can buy and sell currencies, simultaneously. The way it works is much like the process of currency exchange at airports or hotels where you can exchange the currency you deal with for the local currency.
The Forex market is open 24 hours a day 5 days a week, enabling traders to buy and sell around the clock acting on global news events as they happen.
28FOREX allows individual traders the opportunity to access currency prices previously only available to large institutions and wealthy individuals.
Foreign exchanges markets we first developed to facilitate cross border trade conducted in different currencies by government, companies and individuals. In the early days the foreign exchange markets primarily existed to facilitate the international movement of money, however even in the early days there were speculators.
These days a large portion of the Forex market is driven by speculation, arbitrage and professional dealing. In the past retail investors could only gain access to the foreign exchange market through banks that transact large amounts or currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971.
The 20th century saw the rise and fall of a number of economic agreements and exchange rate mechanisms, all of which were created with intention of promoting international economic stability and to provide an efficient and reliable means for valuing exchange rates. The most notable of these was the Bretton Woods agreement, stretching from 1944 to 1971.
The Bretton Woods agreement was born in 1944 at the conclusion of world war II with the intention of promoting international economic stability and freer trade, both were thought to be major causes of the war. It was created by John Maynard Keynes, the father of Keynesian economics, and Harry Dexter White. Its key points included:
This was the most powerful agreement affecting exchange rates over the 20th century, stretching 27 years and setting in place the role of the USD as the worlds base currency. Of the above key points, only the first is still in place today, with the IMF, World Bank and GATT continuing to play a key role in the international economy.
Forex trading is similar to trading share or futures except that when trading forex you are buying or selling one currency against another. One of the key advantage forex trading has over other financial instruments is that relatively small lot sizes can be traded, lot sizes can be as small as 1000 units or one micro lot. Typically forex trading also involves leverage which in some cases can be as high as 1:500, this is very different to trading shares where no leverage is involved. Leverage allows traders to trade with more money than they actually have in their trading account, For example if you had 1:100 leverage you could use a $1,000 deposit to control $100,000 worth of currency. Using leverage can result in an increase in you gains however if not used correctly if can also result in increased losses.
Every currency pair consists of a base currency and a term/quoted currency.
The first currency in the pair is the base currency, the second is the quote or term currency.
As an example with the EURUSD currency pair
EUR = Base currency
USD = Term currency
Bid: the rate at which you can sell the base currency. This is the first rate on the deal ticket below (1.34586).
Ask (or offer): The rate at which you can buy the base currency. This is the second rate on the deal ticket and can be found on the right (1.34588).
The spread of a currency pair is the difference between the bid and the ask rate.
28FOREX offers some of the tightest spreads of all Forex brokers globally, our EURUSD spread which can be seen on the deal ticket above is currently the lowest global average spread.
A pip represents the smallest increment that an exchange rate can move. One pip is 0.01 for currency pairs with JPY as the term currency and 0.0001 for all other pairs. 28FOREX offers fractional pip pricing which represents a tenth of a pip. This is to improve the spread offered to clients and improve the precision with which they can trade.
Margin is the amount of money required in your account in order to open a position. Margin is calculated based on the current price of the base currency against USD, the size (volume) of the position and the leverage applied to your trading account. If you do not have sufficient free equity available you will be unable to open a position on the trading platform. The free margin amount shown in the trading platform is the amount you have available to use should you wish to open additional positions.