What is Forex Trading

The foreign exchange market (Forex, FX or currency market) is where currencies are traded. In order to conduct foreign trade and business, currencies are needed for exchange. The Forex market is decentralized which means trades are conducted over the counter than one centralized exchange.

Participants

Starting with governments and central banks, these are most likely the most influential participants in the Forex market. People who require foreign currency for small transactions deal with banks or other financial institutions. Speculators are another type participant in the Forex market; they try to make money by taking advantage of fluctuating exchange-rate levels.

Terms

When one is buying and selling currencies, the two currencies form a currency pair to be traded for one another. An example of a currency pair is USD/JPY with the first currency in the pair being the base currency and the second one being the counter currency.

Lot

A lot is a unit to gauge the amount of the trade.

Bid/Ask

Whether you are buying or selling on the Forex market, you are quoted an ask price or a bid price. An ask price is at what price you can buy a currency from a dealer and the bid price is at what price you wish to sell your currency.

Spread

A spread is what you call the difference of the ask and bid price of a currency pair.

Pip

The smallest change of the price of currency is called a pip. All currency pairs are priced at a fixed precision. The USD/JPY pair are priced two digits after the decimal point (E.g. 120.05). 0.01 will always be the smallest change of the currency pair which means 1 pip is equal to 0.01.