What is the Foreign Exchange Market?
The Forex (Foreign exchange) market is a giant and high liquid financial market operating 24/5. The Forex markets is a 100% decentralized market that is based on the Electronic Network of the banks (ECN). World currencies are traded within Forex in pairs and it is estimated that the daily volume activity in Forex today is reaching 4 trillion USD.
What is a Currency Pair?
A currency pair includes two currencies that indicate an exchange rate. For example the currency pair EUR/USD. The first quote of the two pairs (EUR in the example) is called the Base Currency. The second quote in the pair (USD in the example) is called the counter pair. All currencies are indicated with specific symbols, here are the most popular symbols:
USD is the Forex symbol of US Dollar
EUR is the Forex symbol of Euro
GBP is the Forex symbol of British Pound
JPY is the Forex symbol of Japanese Yen
CHF is the Forex symbol of Swiss Franc
AUD is the Forex symbol of Australian Dollar
CAD is the Forex symbol of Canadian Dollar
NZD is the Forex symbol of New Zealand Dollar
The most popular currency pairs are EUR/USD and GBP/USD. Why popular pairs are important for traders? Because popularity means liquidity, and liquidity means narrower spreads. The magnitude of the spread defines in a high extend the profitability potential of any Forex trader.
What is a Dealing Desk Broker and what is a Non-Dealing Desk Broker?
A dealing desk Forex broker uses a dealing-desk to provide its clients with pricing and execution. A no-dealing desk broker does not have a dealing desk and uses liquidity from external providers to execute trades. In general No-Dealing Desk (NDD) brokers are offering better trading conditions than dealing-desk brokers. NDD brokers and are divided to ECN and STP Fx brokers.
What is a Market Maker Forex broker?
A market maker Forex broker provides pricing and execution by taking the opposite side of his clients trading orders. A market maker Forex Broker earns from the spread between the bid and offer price. Usually spreads offered by Market Makers are very high and that is why professional traders prefer other types of brokerage, and especially ECN Forex Brokers.
What is an ECN Forex Broker?
ECN means Electronic Communications Network and refers to the global banking network where currencies are traded against its other. A Forex ECN broker as it is already mentioned does not use a dealing desk but instead it passes his clients trading order directly to the ECN system without manipulation and intervention. Trades using the ECN network are executed with anonymity. Traders using the ECN network enjoy lower spreads and have the ability to observe live the market dept. Some ECN Forex brokers charge a trading commission along with the spread, others don’t.
What are Long and Short Positions when trading Forex?
A long position in Forex trading is a position that generates profits from an increase of the price of a currency pair. A short position is a position that generates profit from the decrease of the price of a currency pair.
What is Spread, Buy and Sell Quotes?
The spread is the difference between the buy and the sell quotes and it is measured in pips. For example if GBP/USD is offered at 1.5500-1.5510, the spread is 10 pips.
The buy quote is the price you can buy a base currency and it is displayed on the right. In the previous example of GBP/USD, it was 1.5510.
The sell quote is the price you can sell a currency and it is displayed on the left. In the previous example of GBP/USD, it was 1.5500.
What is a Pip?
A pip is the smallest price increment of any currency pair. For example as concerns GBP/USD the lowest price increment is 0.0001 that means that for GBP/USD 1 pip = 0.0001.
What is a Lot?
A lot in Forex trading is the standard unit size of any transaction. One standard lot usually it is equal to 100,000 units of the base currency. Other sizes include mini lots (10,000 units) and micro lots (1,000 units).
What is Margin in Forex Trading?
Margin is the deposit required by a trader in order to open a trading position. Margin in an account can be either used or free. The used margin is already used for opening or maintaining a position, while the free margin can be used for opening new positions in the future. The amount of margin required is defined by the specific policy of each Forex Broker.
What is Leverage?
The trading Leverage creates an opportunity to trade large amounts of Forex currencies. If you deposit 1,000USD for example and the leverage provided by your broker is 100:1, you can trade up to 100,000 USD. Usually Forex Brokers are offering leverage 100:1 to 200:1, in some cases the leverage can be up to 1,000:1. It sounds like easy money but actually high leverage is the easiest way to loose all your funds. Why? Because as the leverage gets higher, the spread and the commission charged by your broker are getting higher too. When you trade using high leverage you must discipline your trading decisions and concentrating on the major pairs which are offered in narrow spreads. If you use high leverage in minor pairs (offered with spreads 40-50 pips or even more), the probability of loosing funds is huge.
What is Slippage?
Slippage is the outcome of slow order execution and can highly disturb day-traders. The slippage actually is the difference between the price of your trading order and the price that the order is finally executed. The slippage is measured in pips and it is much more intense in volatile markets. The effect of slippage is called also price manipulation. ECN brokers in general provide execution with less slippage than Market Makers do.
◘ Forex FAQ, FxPros.net (2013)