Exactly What Is The Forex Market?
A Brief Introduction
The Forex, which is an acronym meaning “Foreign Exchange,” is also referred to as the Currency market, or the FX market. The Forex market exists wherever one currency is traded for another, and was established between 1971 and 1973 when various central banks throughout the globe introduced a free exchange rate regime, letting the individual currencies fluctuate driven by the market. Today, and being currencies’ primary market, the Forex market is by far the biggest and most liquid financial market in the world, and includes trading between large banks, central banks, currency speculators, financial markets, governments, individuals like you, and other institutions. The Forex trades over the counter (OTC), and thus does not have a physical location, and trades are executed through telecommunications and trading platforms.
The Value of the Forex Contract
One standard contract (also known as one standard lot) in the Forex market is valued at $100,000 US dollars (USD). A mini contract (also known as one mini lot) in the market is 1/10 the value of a standard contract, and is valued at $10,000 US dollars (USD). Many brokerage houses will also offer a micro-mini contract (also known as one micro-mini lot) in the market, where one micro-mini lot is 1/10th of a mini contract, and is valued at $1000 US dollars (USD). When you trade, you can use the appropriate contract type for the size of your trading account. To choose the correct contract type, it will help you to know the value of 1 pip in each contract size. The value of 1 pip for a standard contract (1.00 lots) is $10.00. For the mini contract (0.10 lots) the value is $1.00, and for the micro-mini contract (0.01 lots) the value is $0.10. Using one standard contract as an example, with leverage available at most brokerage houses, you don’t actually need $100,000 in your trading account to buy or sell one contract. With a leverage of only 100:1, you can buy or sell one standard contract with only $1000 in your account. We absolutely do not recommend this trade if in reality you only had $1,000 in your trading account. You are learning the Forex for a lifetime of trading, not so that you can go out in a blaze of glory.
What Is a Forex Contract
A Forex contract is the result of a simultaneous purchase of one currency and the sale of another. A contract is always done in pairs, and is basically buying and selling money in the same time. The contract is also very special as it has no centralized trade location and trades are done around the clock. All contracts are bought by telephone and over computer networks between traders in different parts of the world. The primary market for currencies is the “interbank market” where banks, insurance companies, large corporations and other large financial institutions manage the risks associated with fluctuations in currency rates.
How Much Does it Cost to Trade the Forex
The Forex offers commission free trading. So you may ask yourself, does that mean that I have no costs associated with trading the Forex? Not exactly, the Forex just comes through different cost doors. For example, your cost for doing business in the Forex market is called a spread, and the spread is the difference between the bid and ask price of the currency pair that you are trading. The broker collects the difference between the bid and ask price. Let’s use an example. The trader, using his/her strategies, sees a long buy setup on the GBP/AUD. The bid price is 2.0829, and the ask price is 2.0832. The trader places the order and buys one contract (one lot) of the GBP at 1.0832. If the trader had been selling the GBP, the price would have been 2.0829. The difference (the spread) between the buy and sell price is 3 Pips, and these 3 Pips would be the broker’s commission on one GBP/AUD contract. On a Standard account the broker’s commission would be $30.00, and on a Mini account, the broker’s commission would be $3.00. More contracts would be a multiple of the 3 Pips. The spread will vary from currency pair to currency pair, and from broker to broker, with the bottom line being: the tighter the spread, the better it is for the trader.
Another cost door through which the trader may find himself/herself walking is the Rollover door. The “Rollover” (or interest payment) is the process involved in maintaining an open position past the regular settlement time of 5 p.m. EST. The cost of this process is measured by the interest rates of the two currencies in the currency pair you are trading. If the base (primary) currency has a higher interest rate than the secondary currency, you will receive interest. However, if the base currency has a lower interest rate than the secondary currency, you will pay interest. Although the Rollover is a relatively small amount of money, closing your positions before 5 p.m. EST will eliminate any possibility of either earning or having to pay this interest.
“Why trade the Forex market?” There are a lot of reasons why, here’s just a few of them:
• There is NO market research required.
• Forex margin requirements offer more leverage than stocks or futures – up to 50 times the value of your account. Of course, keep in mind that increased leverage also increases your risk
• You can profit no matter which way the market moves, up or down. Bad market news can be really good news to you.
• Great potential for daily cash flow.
• Tremendous leverage, liquidity, and volatility for maximum profit potential.
• There is NO up tick rule.