The foreign exchange market, also known as forex or FX, is a global marketplace where currencies are speculated and traded.
For example, if you have traveled and exchanged your currency for the local one, you have effectively taken part in a forex trade!
Forex is one of the most active markets in the world, drawing consistent volume daily from international participants. The added flexibility of being able to trade forex 24 hours a day, 5 days a week provides ripe opportunities for FX traders.
Watch this quick video for an overview of forex trading:
Key Terms for New Forex Traders
While forex pairs are similar to stocks or futures, they are unique instruments with their own vocabulary. Included below is a sampling of terms to help new forex traders gain familiarity with the concepts.
Currency Pairs – All tradable forex instruments come in “pairs”. Pairs represent the value of one currency being quoted against another. The currency listed first is known as the base currency and the second currency listed is the quote currency.
- Example: For the EUR/USD currency pair, the base Euro is quoted against the US Dollar. This pair is often referred to the “euro” for short.
Pip – A pip is a unit of measurement used to describe the change in value between two currencies. Originally an acronym for “price interest point” or “percentage in point,” pip now refers to the 4th digit after the decimal in a forex quote.
The fifth digit after the decimal is known as a tenth-pip or pipette. This is the smallest increment a forex pair can move.
Spread – The spread is the difference between the bid and ask prices within a forex quote. Although this concept is universal among other tradable securities, with forex additional emphasis is placed on the spread since this is how forex brokers earn transactional revenue.
Leverage -Leverage is the ability to control a larger amount of money with a small investment. Leverage provides traders the capacity to profit from miniscule market moves since their initial investment is “leveraged.” While leverage presents the possibility of greater profits, it also presents the possibility of greater losses.
Rollovers/Swaps– Forex trading can generate interest as well as gains from profitable trades. Each currency within a pair has its own interest rate, and if the interest rate goes up while in a position, a trader will earn interest or “rollover,” known as positive roll. Conversely, if an interest rate goes down while in a trade, the trader will have to pay rollover, known as negative roll.
Safe Haven Currencies – Similar to the concept of safe haven stocks or commodities, safe haven currencies refer to forex pairs which are less volatile in times of market turmoil and uncertainty.
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