What is the Forex?
The modern foreign exchange, or Forex market as we know it today, was put
into play around 1973. The
establishment of the Bretton Woods Accord in
1944 is generally accepted as the
beginning of Forex market. It was
established to stabilize the global
economy after World War II. It not only
created the concept of pegging
currencies against one another, but also led
to the creation of the International
Monetary Fund (IMF). Currencies from
around the world were pegged against
the U.S. dollar which were in turn
pegged against the value of gold in
an attempt to bring stability to global
economic events. In 1971, this act
finally failed. However, it did manage to
stabilize major economies of the
world including those within the Americas,
Europe and Asia.
“Forex” is an acronym for Foreign Exchange. It is a
market where people
exchange one country’s currency for
another country’s currency. It is called
the cash market or spot market. The
spot market means trading right on the
spot at whatever the price is at the
moment the transaction occurs. This
market was established in 1971 as was
previously mentioned. The Forex
market is the arena in which the
currencies of countries around the globe
are exchanged for one another.
Payments for import and export purchases
and the selling of goods or services
between countries all flow through the
foreign exchange market. This part of
the Forex market is called the
consumer Forex market and this is
where the majority of the daily volume
takes place.
Prior to 1994, the Forex retail
interbank market for small individual
speculative investors or traders was
not available. A speculator investor is
one who looks to make profit on price
movements and is not looking to hold
onto the currency for the long haul.
With the previous minimum transaction
size, the smaller trader was excluded
from being active within the market. In
the late 1990s, retail market maker
brokers (i.e. Forex Capital
Markets/FXCM) were allowed to break
down the large interbank units in
order to offer individual traders the
opportunity to participate in the market.
The Forex market is the largest
financial market in the world. The term
“market” refers to a location where
buyers and sellers are brought together
to execute trading transactions.
Nearly $4 trillion is traded on the Forex
daily. To give one a perspective of
how big this market is, consider the
following: $300 billion each day is
traded on the U.S. Treasury bond market
and $100 billion is traded on the
U.S. stock market every financial day the
market is open. That is a total of
$400 billion per day. The Forex trades
almost ten times that volume.
The Forex marketplace has no physical
location. It is comprised of an electronic medium where transactions are placed
automatically through the Internet or via telephone. It is comprised of
approximately 4,500 world banks and retail brokers who all monitor current
prices, as they constantly change, and who execute transactions for their clients. Individual traders wanting to capture profit by speculating on price
changes get access to the market through a Forex broker.
How Do Traders Get Paid?
The word pip is an acronym for price
interest point. The pip system monitors
price movements in the market. Pips
are usually measured in decimals.
Depending on the pair being traded,
pips are usually the last number of the
decimal in the price evaluation. A
trader’s financial reward is measured in
pips and those pips are converted
into dollars. Most traders in the Forex
market trade with what is called
leverage. Trading with leverage means you
are either borrowing or using someone
else’s money to trade. You do this by
posting a deposit with a broker who
will let you use their money. The
minimum deposit, with some brokers,
for trading with leverage is 1%, but
this number can go up as high as 4%.
Trading on the Forex is done in
currency lots. There are three types of lots.
A micro lot is approximately $1,000
worth of a foreign currency. A mini lot is
approximately $10,000 worth of a
foreign currency. A standard lot is
approximately $100,000 worth of a
foreign currency. To trade on the Forex
market, a margin account must be
established with a currency broker. This
is an account into which profits will
be deposited and from which losses will
be deducted. These deposits and
deductions are made instantly upon exiting
a position.
These three types of lots create
different payouts per lot. A $100,000 unit is
called a standard lot and pays
approximately $10 per pip captured. A
$10,000.00 unit is called a mini lot
and pays approximately $1 per pip
captured. A micro lot is a $1,000
unit and pays approximately $0.10 per pip
captured.
Forex traders love the Forex market
for its availability, liquidity, volatility,
and diversification that leveraged trading
allows.