Forex stands for foreign exchange, the currencies. Forex Trade is the process of buying and selling of foreign exchange or currencies. Statistics indicate that the online Forex Trade is increasingly getting more popular and that the forex market has grown at least 20% in the last five years. As of April 2010, just the daily turnover of forext market was estimated to be around $4trillion, an astounding figure, undoubtedly.
The working of Forex Trade is similar to stocks sale. You have to buy the lower priced ones and sell when its value is higher. The only difference is that there are no companies to choose from, which makes online Forex Trade simple and easy for anyone. Even beginners can trade in forex easily. For example, US dollar is very popular worldwide and most of the population across the globe have an idea about the state of US economy and the standing of US dollar in the market. They can easily buy and sell US dollar. It’s that simple. Another benefit of online Forex Trade is that unlike Stock market, the market does not close in the evening and you can choose to trade 24 hours but just 5 days a week. The market is closed on weekends. This timing is suitable for working population as well, as they can sit on their computers and trade in forex online after their work hours.
As mentioned before, online Forex Trading is similar to any kind of buying or selling. Just take an example. Say you have bought a house for $X and after some time, you have sold it at $Y, obviously an amount higher than X. The difference ($Y-$X) is what you get as profit. The Forex Trade is also just the same. You buy USD dollar at a price and when its value goes up, you sell it and the difference in your cost price and selling price, is what you earn as your profit or earnings. Though forex trade is a simple process, before you get on to it, you should know the terms associated with it.
Terminologies associated with forex trade
The currency of each country in forex trade market is mentioned as a symbol which consists of three letters. The first two letters stand for the country’s name and the third letter is the currency of that particular country. For example, Australia is AUD which is Australian Dollar, Canada is CAD or Canada Dollar, Switzerland is CHF Switzerland Franc, Japan is JPY or Japan Yemen, United States is USD or United States Dollar, New Zealand is NZD or New Zealand Dollar, Great Britain is GBP or Great Britain Pound and Eurozone is EUR or Eurozone Euro. The Latin name of Switzerland is Confoederatio Helvetica, hence the abbreviation ‘CH’. These are few examples. These countries are also some of the most popular countries in forex trade market. They are also known as ‘major’s as these are the currencies where most of the trading takes place. Then there are the currency pairs. Most of the pairing is done with USD and such pairings are known as major pairs and those pairings without USD is referred to as Cross pairs.
PIP: It is a term used for the smallest price change in a currency that can happen. Each major currency is valued up to four decimal points, the smallest change happens in the fourth decimal point. For Japanese Yen, the change is measured on the second decimal point.
Currency pair: The value of a currency is determined by comparing it to another currency and that is why two currencies are considered along with each other. The first currency is referred to as the base currency or the domestic currency and the second one is the quote currency. The currency pair also determines as to how much of the quote currency a trader has to have buy one base currency unit.
Long and short: When a trader buys currency pair with a view to close it at a higher price, then it is said that the trader is going ‘long’. If the trader is going ‘short’, then it means that they are in for sale so that they can buy back at a lower price.