Trading currencies is what forex is all about. It is the biggest financial market in the world, with a daily turnover of about $1,900,000,000,000. This is more money than all the stock markets in the world make in a day.
There is no set exchange rate on the forex market. Over-the-counter (OTC) markets include the forex market. The forex market is all done online or over the phone. Up until about 10 years ago, only big banks could trade on the forex market. Since the Internet came along, more and more people are trading forex on their own, and there are more and more online forex brokers.
Money is always exchanged in pairs. EUR/USD is a typical pair (Euro over US dollars). The first money is called the "base." The second money is called the "counter currency." The pair can be thought of as how many units of the second currency it takes to buy one unit of the first currency. If you bought the above pair, you would buy Euro and sell US dollars at the same time. If the pair was sold, the buyer would buy the Euro and the seller would buy the US dollar. This may sound confusing, but all you have to do is think of the pair as a single item that you are buying or selling. You buy the EUR/USD pair if you think the Euro will go up against the US dollar. If you think the EUR will go down in value compared to the USD, you sell the EUR/USD pair.
You will see two numbers when you look at forex quotes. If we look at the EUR/USD as an example, you might see 1.2350/1.2355. The first number, 1.2350, is the bid price, which is the price at which traders are willing to buy euros against the US dollar. The second number, 1.2355, is the offer price. This is the price at which traders are willing to sell the EURO against the US dollar. The spread is the difference between the bid price and the offer price. Most major currencies have a spread of 3 to 5 pips (explained later).
The pip is the most common unit of currency change. The difference between 1.2350 and 1.2351 is one pip. A pip is the last place where a quote has a decimal point. Most currencies quoted to 4 decimal points. The yen, on the other hand, is written with two decimal places, like 139.41. The term "pip" is just forex jargon, so if a forex trader says the Euro has gone up 20 pips against the US dollar, add 20 points to the decimal part of the EUR/USD pair.
Forex is usually bought and sold in lots, which are also called contracts. A lot is usually worth $100,000. In the last few years, a mini-lot size of $10,000 has been introduced, and it is becoming more and more popular. Most forex brokers offer 1 percent margins, which is called leverage. This means that $1000 is enough to control one standard lot of $100,000. To open a standard-sized forex account, you would usually need at least $2500.
Most forex brokers let you open a mini account with $300. For a one mini lot trade, you need a $100 margin, which controls $10000. If the value of the currency goes up by 1% and you trade one mini lot worth $100,000, you would make $100, which is the same as your original margin. Forex trading is a very profitable market to get into, and traders who are new to the market should trade on a mini account for a long time. A mini account is a low-cost way to start trading on the forex market, since all you need is $300 to open an account. Even as you learn more about forex trading, you can still make money. You can trade one mini lot until you make your first $100, at which point you can trade two mini lots. As you gain experience, you will be able to trade standard-sized lots.
Traders of other financial products are becoming more and more interested in Forex. It can be traded in much smaller amounts than other financial products, which makes learning to trade forex safer than learning to trade on other markets. Forex trading is a market that no trader can ignore because it can be very profitable.
