WHAT IS FOREX TRADING [3]

The above started an Asian crisis in the years1997 -1998 that led a Yen crash. It resulted in a tumble of the Yen-US dollar pair from 115 Yens for one US dollar to 150.

The global economic crisis touched almost all fields of human activities. Forex currency market was no exception. Though, Forex participants (central banks, commercial banks, investment banks, brokers and dealers, pension funds, insurance companies and transnational companies) were in a difficult position, the Forex market continues to function successfully, it is a stable and profitable as never before.

The financial crisis of 2007 has led to drastic changes in the world's currencies values. During the crisis, the Yen strengthened most of all against all other currencies. Neither the US dollar, nor the euro, but the Yen proved to be the most reliable currency instrument for traders. One of the reasons for such strengthening can be attributed to the fact that traders needed to find a sanctuary amid a monetary chaos.

Ask and Bid

When traders want to place an order on the Forex market they should be aware of the currency pair as well as the price of this pair. A Forex market price of a currency pair is denoted by two symbols, Ask and Bid, which have specific digital notations.

Ask price is the highest price in the pair’s quotation at which a trader buys the currency, standing first in the abbreviation of the currency pair. Consequently, a trader sells the currency standing second.

Bid price is the lowest price in the quotation of the currency pair, at which a trader sells the currency standing first in the abbreviation of the currency pair. Respectively, a trader buys the currency standing second.

Seem complicated? here's an example:

Let's assume that we have the currency pair of EUR/USD with the quotation of

1.3652/1.3655. This means that you can buy 1 euro for 1.3655 dollars or to sell 1 euro for 1.3652 dollars. The difference between the Bid price and the Ask price is called spread.

The spread is actually the commission of the broker. The Spreads in Forex trading are actually very small compared to currency spreads at banks.

A term that you'll see a lot while trading Forex is "pip" and "pips" - a “pip” stands for “Percentage in Point”. A pip is the smallest price movement of a traded currency. It is also referred to as a “point”. It is very important that you understand what a pip is in the

Forex trading because you will be using pips in calculating your profits and losses.. For most currencies a pip is 0.0001 or 1/100 of a cent.

When a currency moves from a value of 1.2911 to 1.2914, it moved 3 pips. When a pip has a value of $10, you have gained $30.

There is an exception for quotations for Japanese Yen against other currencies. For currencies in relation to Japanese Yen a pip is 0.01 or 1 cent.

Another term that you'll need to understand in relation to Forex trading is “Lots”. A lot is the minimal traded amount for each currency transaction. For regular accounts one lot equals 100,000 units of the base currency. However you can also open mini and micro accounts that allow trading in smaller lots.

Understanding the Pip Spread - The spread is closely associated with the pip and has a major importance for you as a trader. As mentioned above, It is the difference between the selling and the buying price of a currency pair. It is the difference in the bid and ask price. The ask is the price at which you buy and the bid is the price at which you sell.

Suppose the EUR/USD is quoted at 1.4502 bid and 1.4505 ask. In this case the spread is 3 pips. The pip spread is your cost of doing business here. In the case above it means you sustain a paper loss equal to 3 pips at the moment you enter the trade. Your contract has to appreciate by 3 pips before you break even. The lower the pip spread the easier is it for you to profit.

Generally the more active and bigger the market, the lower the pip spread. Smaller and more exotic markets tend to have a higher spread. Most brokers will be offering different

spreads for different currencies. Smaller accounts will generally have higher spreads than bigger regular accounts.

From the profitability point of view it is important to find a broker offering a lower pip spread, however the low spread is not everything. More important is to choose a reputable and reliable broker.

Most brokers will allow leverage. Leverage is defined as the use of borrowed capital, such as “margin” allowing the trader to gain access to larger sums of capital. This can heighten profits and losses and should be used wisely.

Here's an example: Trader A has $5000 USD – If Trader A has an account leverage of 10:1 and he wishes to use $1000 on one trade as margin, he will have an exposure of $10,000 in base currency ($1000) = 10 x $1000 = $10,000 (trade value).

Trader B has $5000 USD – If Trader B has an account leverage of 100:1 and he wishes to use $1000 on one trade as margin, he will have exposure of $100,000 in base currency ($1000) = 100 x $1000 = $100,000 (trade value).