To be able to learn forex market one must first know the basic terms and conditions pertaining to the said subject. Forex in its simplest definition means foreign exchange. In a forex trade you buy one currency while simultaneously selling another. The foreign exchange market is like an over-the-counter market. A learner in forex market trading must know a number of factors about it, which allow it to operate as an exchange market.
- Constant demand and supply
- The commodity is to be bought and sold in the standard lots
- Prices are set by the levels of supply and demand
- A fixed minimum unit of price change (called a point or pip, which means point in percentage) of one currency against another
One might ask where are the sources for the forex market coming from? Basically the daily turnover in the world’s currencies comes from two sources; namely, foreign trade and speculation for profit. Foreign trade is where companies buy and sell products in foreign countries and converting their profits in domestic currency, while speculation for profit focuses on the major currencies of the world. These major currencies are the US Dollar, Japanese Yen, EURO, British Pound, Swiss Franc, Canadian Dollar and the Australian Dollar. Unlike other financial markets, investors in forex markets can respond immediately to currency fluctuations-whenever they occur, day or night.
Anyone who wants to learn forex market trading must know how to read a forex quote. Reading a forex quote is simple as long as you remember two things:
1. The first currency listed is the base currency
2. The value of the base currency is always 1.
Just like other markets a forex quote consists of two sides and one interested to learn forex market must note these two; first is the BID, the price at which you can SELL the base currency and the other is the ASK, the price at which you can BUY the base currency. Currencies are traded in standardized pairs. The four main pairs are EURO/USD, GBP/USD, USD/JPY and USD/CHF. Each currency pair is made up of a base currency and a quote currency. The base currency is the first currency in the currency pair and this currency is bought or sold using the quote currency. For example, in the currency pair GBP/USD the British Pound is the base currency and we buy and sell it for US Dollars.
One learning in forex market trade will notice that in some currency pairs USD is the base currency, and in some the quote currency. People in the business are very familiar with whether USD is the base or quote currency and because of this they often omit mentioning the USD at all in a pair. They will simply say GBP was bought or JPY was sold which means in the first case GBP was bought for USD and in the second case USD was sold against the JPY.
An example of a full quote looks like this:
EUR 1.2700/1.2703
This tells us that the broker is ready to buy 1 EURO for 1.2700 USD (the BID price) and ready to sell 1 EURO for 1.2703 USD (the ASK price). This difference between the BID and the ASK (here 0.0003 USD or 3 points) is known as the spread. Finally the learner in forex market trade should note that the CHF, EURO and GBP are measured in numbers with four decimal places, while the JPY has two places. Consequently for the EURO the minimum change is equal to 0.0001 of the price and for the JPY it is 0.01. For EUR/USD, GBP/USD and any other pair where USD is not the base currency the value of 1 point equals to 1 USD when you buy a lot of 10,000 units of the base currency. For USD/CHF, USD/JPY and any other pair where USD is not the base currency the value of 1 point in a lot fluctuates depending on the current rate.
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This resource is really nice and help you understand how these things work.