Before engaging into the Forex trading, you should first know what exactly Forex market is. Forex or foreign exchange market is where you can buy or sell currencies. It is similar to stock trading but the only difference is the product of transactions. You can trade many different currencies from all over the world on Forex market, which is now considered to be the most liquid market, operating 24 hours a day. There is a special commission CFTC that regulates the Forex market, but it is relatively loose. But, there is also Natural Futures Association, which regulates retail Forex brokers and market traders.
In order to understand Forex market better, you should start with some basic terminology used in this type of trading. These are the terms you might encounter during the Forex transactions.
The first Forex term is cross rate. In Forex, currencies are traded by pairs, like EUR/USD. So, you might notice that the US dollar is second in this pair, which means it is not determining the exchange rate, but Euro does. So if you see 1.4582 EUR/USD, it means that $1 USD equals to EUR 1.4582. And Euro as the referred exchange rate is called the cross rate.
The next Forex trading term is pip. Pip is the abbreviation, which says percentage in point. Pip is the smallest rate unit the currency moves for. It is very important, because pip determines how much profit you have generated.
There is also bid and ask in trading. Bid is the cost price of the dealer and ask is the selling price. Bid and ask are always quoted together and the difference between them is called the spread. The market makers can make profits from the spread, determining the bid-ask quotation.
Now that you know some Forex terminology, you should also be aware of the Forex trading participants and why they do that. Some of the main players in Forex market are governments and central banks of all countries. They trade to maintain their Forex reserves.
There are also business firms that do Forex trading, when they have to do hedging or locking of certain favorable currency price in a particular pair.
Banks and financial institutions are also involved in Forex trading. But they mostly trade on the interbank market, generating profit from the spread.
There are also retail Forex brokers, which can be found online. Many individual traders with small capital get the opportunity to trade on Forex through these retail brokers. There are trading accounts on brokers’ platforms, which traders can use, trade on Forex and generate profits. And online Forex brokers usually provide traders with demo accounts for trying out the offered platform and practice their trading. Besides the demo account, you can also get other supportive tools to help you trade successfully like e-books, tools for technical analysis, automatic trading systems, signals and many more.
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