Traders Own

Introduction to Forex



The foreign exchange (Forex) market is the arena in which a nation's currency is exchanged for that of another at a mutually agreed rate. It was created in the 1970s, when international trade transitioned from fixed to floating exchange rates, and is now considered to be the largest financial market in the world because of its huge turnover.

All currencies are traded in pairs and each is assigned with an abbreviation (for example, GBP for a British pound, USD for a US dollar, JPY for a Japanese yen, etc).

The "base" currency is the first currency in the pair. The "quote" currency, or "term" currency, is the second currency in the pair.

This abbreviation specifies how much you have to pay in the quote currency to obtain one unit of the base currency (in this example, 120.25 Japanese yen for one US dollar). The minimum rate fluctuation is called a point or a pip.

1 pip is 0.01 for currency pairs with JPY and 0.0001 for the rest of the pairs. Alpari offers fractional pips, that is why on your platform you will see five or three (for JPY pairs) digits after the point (0.00001/0.001).

The currency pairs on Forex are quoted as the bid and ask (or offer) prices:

Bid: The rate at which you can sell the base currency, in our case it's the US dollar, and buy the quote currency, ie the Japanese yen.

Ask (or offer): The rate at which you can buy the base currency, in our case the US dollar, and sell the quote currency, ie the Japanese yen.

Spreads: The difference between the bid and the ask prices.

Currency rate: The value of one currency expressed in terms of another. The fluctuation rate depends on numerous factors including the supply and demand on the market and/or open market operations by a government or by a central bank.

Lot: Usually contract size is based on a lot system, and for most currency pairs 1 lot is 100,000 units of a base currency.



Forex Guide sponsored by Alpari (UK)