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Forex Essential

Forex (FX) is the marketplace where various national currencies are traded. The forex market is the largest, most liquid market in the world, with trillions of dollars changing hands every day. There is no centralized location, rather the forex market is an electronic network of banks, brokers, institutions, and individual traders.

Many entities, from financial institutions to individual investors, have currency needs, and may also speculate on the direction of a particular pair of currencies movement. They post their orders to buy and sell currencies on the network so they can interact with other currency orders from other parties. The forex market is open 24 hours a day, five days a week, except for holidays. Currencies may still trade on a holiday if at least the country/global market is open for business.

When trading currencies, they are listed in pairs, such as USD/CAD, EUR/USD, or USD/JPY. These represent the U.S. dollar (USD) versus the Canadian dollar (CAD), the Euro (EUR) versus the USD and the USD versus the Japanese Yen (JPY).

In the forex market currencies trade in lots, called micro, mini, and standard lots. A micro lot is 1000 worth of a given currency, a mini lot is 10,000, and a standard lot is 100,000. This is different than when you go to a bank and want $450 exchanged for your trip. When trading in the electronic forex market, trades take place in set blocks of currency, but you can trade as many blocks as you like.

The forex market is open 24 hours a day, 5 days a week across major financial centres across the globe. This means that you can buy or sell currencies at any time during the week. Many investment firms, banks, and retail forex brokers offer the chance for individuals to open accounts and to trade currencies.

You can buy or sell the currency of a particular country, relative to another currency. In the world of electronic markets, traders are usually taking a position in a specific currency, with the hope that there will be some upward movement and strength in the currency they’re buying or selling, so they can make a profit.

Terminology

This is the place where banks, businesses, governments, investors and traders exchange and speculate on currencies. It is also called The Currency Market and it is the most liquid market in the world with an average daily trading volume exceeding $5 trillion. It is open 24 hours a day, five days a week.

The Broker or Brokerage Company is an independent Financial Institution that acts as а mediator for the making of transactions with financial instruments and guarantees their execution.

The bid is the price at which the market (or your broker) will buy a specific currency pair from you.

The ask price is the price at which the market (or your broker) will sell a specific currency pair to you.

The spread is the difference between the bid and the ask price of a security or asset.

Pip is the smallest increment of price movement a currency can make. Also called point or points. For example, 1 pip for the EUR/USD = 0.0001

Definite amount of units or amount of money accepted for operations handling (usually it is a multiple of 100).

Swap rate is the different of interest rate from the two currency when you exchange them in a position.

Leverage is the ability to have a small amount of capital in your account controlling a larger amount in the market.

A drawdown is the peak-to-trough decline during a specific recorded period. A drawdown is usually quoted as the percentage between the peak and the subsequent trough. Those tracking the entity measure from the time a retrenchment begins to when it reaches a new high.

Margin is the term given to the amount of money required in your account in order to open or maintain a position.

A margin call is a warning message that occurs when a trader’s account is running out of sufficient funds to sustain their current open positions on the market.

Special trading instrument that allows financial speculation on stocks, commodities and other instruments without actually buying.

An automated script which is used by the trading platform software to manage positions and orders automatically without (or with little) manual control.

A difference between the previous period's close price and the next period's open price. In Forex usually only occurs during weekends — between the Friday's close and the Monday's open price.