Basics of Forex Market

Post By - Laxmi Mahera
Review By : Rohan Sharma
Updated on : October 26, 2021

Forex Market

The term “forex” stands for “foreign exchange,” and it refers to the purchase or sale of one currency for another. It’s the world’s most heavily traded market because individuals, businesses, and countries all engage, and it’s a simple market to enter without a lot of money. In comparison to other markets, the forex market is also less volatile. The foreign currency market is open five days a week, 24 hours a day.

Market Size

In terms of trade volume and liquidity, the forex market is the largest financial market on the planet. This market’s average daily turnover is $6.6 trillion.

The following is a breakdown of the $6.6 trillion:

The $6.6 trillion break-down is as follows:
$2 trillion in spot transactions.
$1 trillion in outright forwards.
$3.2 trillion in foreign exchange swaps.
$108 billion currency swaps.
$294 billion in options and other products.

Some currency pairs in forex market

USD/CAD
EUR/USD
USD/CHF
GBP/USD
NZD/USD
AUD/USD
USD/JPY etc.

Currency Pair

A currency pair is a pair of currencies where the value of one currency is stated against the value of the other. The base currency is the first listed currency in a currency pair, while the quote currency is the second listed currency.
When a currency pair is acquired, the first listed currency, or base currency, is purchased, while the second listed currency, or quote currency, is sold, and vice versa.

Buying & selling in forex market

Speculating on the upward and downward price movements of a currency pair in the hopes of making a profit is what buying and selling forex is all about. Buying one currency and selling another is the basis of all forex trading, which is why it is quoted in pairs.
If you think the base currency will strengthen versus the quote currency, you should purchase it, and if you think it will weaken, you should sell it.

Participants in Forex market

Commercial & investment banks
Central bank.
Investment managers & hedge funds.
Retail market participants etc.

What are Pips

Pip stands for “percentage in point” or “price interest point.” A pip is the smallest price change that an exchange rate can make, according to forex industry tradition. The pip change is the last (fourth) decimal point in most currency pairs with four decimal places. As a result, a pip is equal to one basis point, or 1/100 of a percent.

How Pips work?

The term “pip” refers to a fundamental notion in foreign exchange (forex). Bid and ask quotations that are accurate to four decimal places are used to disseminate exchange quotes in forex pairs. Forex traders, to put it another way, buy and sell a currency whose value is expressed in relation to another currency.
Pips are a unit of measurement for exchange rate movement. The lowest change for most currency pairs is 1 pip because most currency pairs are quoted to a maximum of four decimal places. The value of a pip can be estimated by dividing the exchange rate by 1/10,000 or 0.0001.

Lots in forex market

Lots, or the quantity of currency units you will buy or sell, are the most common units used in forex trading. A “lot” is a unit of measurement for a transaction’s value. Orders are put in lots when you use your trading platform to place orders.

Spread in forex

When exchanging or trading currencies, the forex spread is the difference between a forex broker’s sell and purchase rates.
Depending on the currency, the time of day a deal is initiated, and economic conditions, spreads might be narrower or broader.
Brokers can increase or decrease their bid-ask spread, resulting in an investor paying more for a purchase and receiving less for selling.

How to calculate Spread?

Simply find the difference between the Ask and Bid prices to compute the spread. For instance, if the current market price of EUR/USD is 1.2098 and the Ask price is 1.2099, the spread is 0.0004. (Ask-Bid price).

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Basics of Forex Market