How Does Forex Trading Works

Forex or FX is a short form of Foreign Exchange Market. The concept of foreign currency trading is very simple, once it is proved that currency is a commodity whose value varies from one currency to another. foreign currency traders aim to make profits from changes in foreign exchange rates by Buying or selling a currency. The beauty of the foreign exchange market is that the cost of trading is very low. This means that trading transactions can be executed for a very short period of time, in fact, in seconds, and also for long periods of time.

Examples: ic markets discount

The trader feels that the EUR is going to increase in comparison to the USD and he buys EUR 1 million at the rate of 1.5000. Immediately, the rate goes up to 1.5050, and the trader closes the position for USD 5,000.

1.50 EUR 1,000,000 = USD 1,500,000

1.5050 EUR 1,000,000 = USD 1,505,000

Difference = profit of USD 5,000

Currency pairs

In the foreign exchange market, the price of one currency is being quoted against the other currency. The base currency is that which can be seen as a reference. For example, in the EUR / USD price, the EUR is the base currency, and the price indicates how much the dollar will be to buy it. Similarly, in USD / JPY, USD is the base currency and the rate determines how much JPY will be in buying it.

Major Currency Pairs

There are 170 currencies in the world. However, activity is centered in ‘major’ currency pairs, which is roughly two-thirds of the total sales.

These are the main ones:

EUR / USD (27%)

USD / JPY (13%)

GBP / USD (12%)

AUD / USD (6%)

USD / CHF (5%)

USD / CAD (4%)

Bids and offers

The bid is the price which the market is willing to pay for a particular foreign currency pair. Offer, or Ask, is the price at which it is ready to sell.

For example, in USD / CHF the price is 1.1650 / 1.1653, the bid is 1.1650 whereas the offer is 1.1653. Often, expressions are summarized in ‘small numbers’. In this case, the phone will be 50/53. The difference between bid and offer is called spread.

Pips

‘Pip’ (Price Interest Point) represents the smallest change in the currency pair. For most of the currencies, the quote is said in the fourth decimal place, there is a significant exception to the USD / JPY. Pip represents the 1 / 10,000th of the counter currency, or 0.0001. The change of 1 pip in GBP / USD at 1.6319 is 1.6320. For USD / JPY only the Pip is reported in the second decimal point (1 / 100th or 0.01).

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