What Is Forex ?

People heard the term "Forex", but most of them do not Know what is Forex?

Forex or foreign exchange is the financial market which trades in international currencies. The forex market determines the values of currencies around the world. Traders from all over the world buy and sell currencies or currency pairs. There are plenty of currency pairs available and the forex market moves constantly based on supply and demand.

Forex determines the exchange rates of currencies and allows traders to profit from price movements. It is the biggest and most liquid financial market with daily turnover of over $5 Trillion per day, in the world and is open for business 24 hours a day except for weekends.

One of the most appealing factors for forex trading, besides its high liquidity, is the small amount of capital requirements and the potential for profits in relation to the investment. Usually Forex account is leveraged which means the capital needed in order to execute a big trade can be very small. Some accounts are leveraged up to 500 times or even 1,000. An account that is leveraged 500 times means that the trader needs to pay $1 for every $500 traded.

Leverage may be the best tool for traders, but traders need to understand how to use the tool otherwise it can cause heavy losses to the traded amount. The biggest advantage leverage gives traders is the ability to trade large amounts of money and profit from them. For example a trader has $500 to use for trading purposes and in a normal non-leveraged account the trade can place trades for $500. An account which is leveraged 500 times would allow the trader to place forex trades worth $500x$500 with the $500. Using leverage can be very risky if traders do not understand how to use it properly and have poor money as well as risk management procedures in place.

Forex pairs are traded in lots. One standard lot represents 100,000 units. In other words if you execute a buy order for one lot you are purchasing 10,000 currency units.

Forex price movements are defined as pips. One pip is the smallest price move on a classical four digit account. For example if the EUR/USD Forex pair trades at 1.3440 and the price moves one pip higher the new price would be 1.3441. On five digit account the smallest price movement possible is called a pipette and represents one-tenth of a pip. Ten pipettes equals one pip.