What is Forex

What is Forex Market?

Before going to trade into Forex Market you must know what is forex or  basic  concept of  forex ?  It is basically describes the buying and selling of currency in foreign exchange market ,especially by traders and investors like you and  me. The familiar saying  “Buy low and Sell high” It is certainly applies to currency trading. In Forex Currency Market traders purchases currencies like  these Currency Pairs GBP/USD or EUR/USD or USD/JPY  that are undervalued and sells currencies that overvalued just like Stock trading.

Foreign exchange (Forex or FX) is the largest  market in the world with daily trading volume over 4 $trillion, the 24 hour market has attracted investors around the globe with it’s high liquidity, low transaction cost. The following  articles aim  to introduce the key concepts in forex trading, the terminologies and characteristics.

This article first introduce the concept of  “spread or difference of bid /ask”, which is most important transaction cost in forex trading, and how the spread presented in price quotes, what is the signification of this and what is tricked behind it. Many retail customers trade with margin account you must have to know the signification of margin, how to trade and how to choose the correct leverage ratio.

Forex market is over-the-counter(OTC) market, which mean there is no central exchange or clearing house where order are matched. It is different level of access, currencies are traded in different market makers.

1. The Interbank Market 

 Large commercial banks trade with each other through the Electronic Brokerage System (EBS). Banks will make their quotes available in this market only to those banks with which they trade. This market is not directly accessible to retail traders.

2- Online Market Maker

Retail traders can access the FX market through online market makers that trade primarily out of the US and the UK. These market makers typically have a relationship with several banks on EBS; the larger the trading volume of the market maker, the more relationships it likely has.

3. Marker Hours

Forex is a market that trades actively as long as there are banks open in one of the major financial centers of the world. This is effectively from the beginning of Monday morning in Tokyo until the afternoon of Friday in New York. In terms of GMT, the trading week occurs from Sunday night until Friday night, or roughly 5 days, 24 hours per day.

4. Spread

there are two prices for each currency pair, a “bid” (or sell) price and an “ask” (or buy) price. The bid price is the rate at which traders can sell to the Market Makers, while the ask price is the rate at which traders can buy from the Market Makers.

5. Margin

It is the amount of equity that must be maintained in a trading account to keep a position open. It acts as a good faith deposit by the trader to ensure against trading losses. A margin account allows customers to open positions with higher value than the amount of funds they have deposited in their account.

Trading a margin account is also described as trading on a leveraged basis. Most online forex firms offer up to 200 times leverage on a mini contract account. The mini contract size is usually 10,000 currency unit, 1/200th of 10,000 equals to 50 currency unit, meaning only 0.5% margin is required for open positions. Compare to future contracts, which require 10% margin for most contracts, and equities require 50% margin to the average investor and 10% margin to the professional equity traders, foreign exchange market offers the highest leverage among the other trading instruments.

The equity in excess of the margin requirement in a trading account acts as a cushion for the trader. If the trader loses on a position to the point that equity is below the minimum margin requirement, meaning the cushion has completely worn out, then a margin call will result. Generally, in online forex trading, the trader must deposit more funds before the margin call or the position will be closed. Since no calls are issued before the liquidation, the margin call is better known as ‘margin out’ in this case. 

The account will be margined out, meaning all the positions will be closed, once the equity falls below the margin requirement. 

Thanks for reading this article next will more attractive… stay tuned

If you want to know more Forex links so click.

Forex Training In Urdu

Currency Pairs