The Foreign Exchange Market, or Forex, is an over-the-counter trading of currencies between buyers & sellers of all kinds.
The forex market is the largest financial market accounting for about $6 trillion being traded on a daily basis.
The US dollar (USD) $ is the most traded currencies in the world seconded by the Eurozone's Euro (EUR)€.
I know you are not here to learn about the trading of physical banknotes because it is not what you have been hearing about from your friends.
We are going to talk about currency or forex derivatives which do not require the physical trading of banknotes.
A forex derivative is a contract between you, the speculator, and a middleman your broker which allows you to trade (buy or sell) the price fluctuations or exchange rates between two currencies (a currency pair). It legalizes your entitlement to any profits or losses realized in your trading endeavours.
A currency pair is quoted in the fashion USD/JPY: XXX.XX to the left is your currency pair & to the right the exchange rate or value of the pair. The exchange rate is the price of the base currency (USD) in terms of the quote currency (JPY) as per example.
I have used the US Dollar (US$) in terms of the Japanese Yen (¥).
Here are five major currency pairs; EUR/USD, USD/JPY, GBP/USD, NZD/USD & AUD/USD. All major pairs have the US Dollar. And the minor pairs are other pairs that include USD and emerging currencies USD/ZAR & between other currencies GBP/EUR.
HOW TO READ CURRENCY QUOTES:
An example USD/ZAR: 13.0000
Above is the price of the US Dollar in terms of the South African Rand. The amount 13.0000 is the exchange rate or is how much is needed of the quote currency ZAR to get 1 unit of the base currency USD. It is the exchange rate.
As shown above, it is quoted to the fourth decimal point. Almost all pairs are quoted in that way except for USD/JPY which is quoted to the second decimal XXX.XX
WHAT IS A PIP? - peep this;
Pip is short of Percentage in Point - it is the smallest unit movement the price of an exchange rate (or asset: currency pair) can make in this case. It's how you quantify your wins and losses.
(More on Pips on my second post where you will learn how to calculate etc )
BID/ASK PRICE AND SPREAD:
A bid price is the price or exchange rate at which you sell (short) a currency pair granted you foresaw a dip in the price or bearish market (downtrend).
An ask price is the exchange rate at which you buy (long) a currency pair granted you foresaw a bullish market (uptrend). Or the rate at which your broker is willing to sell to you the pair.
A spread is the difference between the Ask and Bid prices. This is basically what you pay your broker for facilitating your transactions. It is broker's commission per trade.
MORE ON BROKERS ON MY NEXT POST. ALSO WHERE I WILL COVER THE MORE PRACTICAL STUFF!
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