What is Forex?

FOREX - the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.

Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.

In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.

Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.

Average daily international foreign exchange trading volume was $1.9 trillion in April 2004 according to the BIS study.

Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.

This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).

Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.

Forex Glossary

Ask (Offer) - price of the offer, the price you buy for.

Aussie - a Forex slang name for the Australian dollar.

Bank Rate - the percentage rate at which central bank of a country lends money to the country's commercial banks.

Bid - price of the demand, the price you sell for.

Broker - the market participating body which serves as the middleman between retail traders and larger commercial institutions.

Cable - a Forex traders slang word GBP/USD currency pair.

Carry Trade - in Forex, holding a position with a positive overnight interest return in hope of gaining profits, without closing the position, just for the central banks interest rates difference.

CFD - a Contract for Difference - special trading instrument that allows financial speculation on stocks, commodities and other instruments without actually buying.

Commission - broker commissions for operation handling.

CPI - consumer price index the statistical measure of inflation based upon changes of prices of a specified set of goods.

EA (Expert Advisor) - an automated script which is used by the trading platform software to manage positions and orders automatically without (or with little) manual control.

ECN Broker - a type of Forex brokerage firm that provide its clients direct access to other Forex market participants. ECN brokers don't discourage scalping, don't trade against the client, don't charge spread (low spread is defined by current market prices) but charge commissions for every order.

ECB (European Central Bank) - the main regulatory body of the European Union financial system.

Fed (Federal Reserve) - the main regulatory body of the United States of America financial system, which division - FOMC (Federal Open Market Committee) � regulates, among other things, federal interest rates.

Fibonacci Retracements - the levels with a high probability of trend break or bounce, calculated as the 23.6%, 32.8%, 50% and 61.8% of the trend range.

Flat (Square) - neutral state when all your positions are closed.

Fundamental Analysis - the analysis based only on news, economic indicators and global events.

GDP (Gross Domestic Product) - is a measure of the national income and output for the country's economy; it's one of the most important Forex indicators.

GTC (Good Till Cancelled) - order to buy or sell of a currency with a fixed price or worse. The order is alive (good) until execution or cancellation.

Hedging - maintaining a market position which secures the existing open positions in the opposite direction.

Jobber - a slang word for a trader which is aimed toward fast but small and short-term profit from an intra-day trading. Jobber rarely leaves open positions overnight.

Kiwi - a Forex slang name for the New Zealand currency - New Zealand dollar.

Leading Indicators - a composite index (year 1992 = 100%) of ten most important macroeconomic indicators that predicts future (6-9 months) economic activity.

Limit Order - order for a broker to buy the lot for fixed or lesser price or sell the lot for fixed or better price. Such price is called limit price.

Liquidity - the measure of markets which describes relationship between the trading volume and the price change.

Long - the position which is in a Buy direction. In Forex, the primary currency when bought is long and another is short.

Loss - the loss from closing long position at lower rate than opening or short position with higher rate than opening, or if the profit from a position closing was lower than broker commission on it.

Lot - definite amount of units or amount of money accepted for operations handling (usually it is a multiple of 100).

Margin - money, the investor needs to keep at broker account to execute trades. It supplies the possible losses which may occur in margin trading.

Margin Account - account which is used to hold investor's deposited money for FOREX trading.

Margin Call - demand of a broker to deposit more margin money to the margin account when the amount in it falls below certain minimum.

Market Order - order to buy or sell a lot for a current market price.

Market Price - the current price for which the currency is traded for on the market.

Momentum - the measure of the currency's ability to move in the given direction.

Moving Average (MA) - one of the most basic technical indicators. It shows the average rate calculated over a series of time periods. Exponential Moving Average (EMA), Weighted Moving Average (WMA) etc. are just the ways of weighing the rates and the periods.

Offer (Ask) - price of the offer, the price you buy for.

Open Position (Trade) - position on buying (long) or selling (short) for a currency pair.

Order - order for a broker to buy or sell the currency with a certain rate.

Pivot Point - the primary support/resistance point calculated basing on the previous trend's High, Low and Close prices.

Pip (Point) - the last digit in the rate (e.g. for EUR/USD 1 point = 0.0001).

Profit (Gain) - positive amount of money gained for closing the position.

Principal Value - the initial amount of money of the invested.

Realized Profit/Loss - gain/loss for already closed positions.

Resistance - price level for which the intensive selling can lead to price increasing (up-trend).

Scalping - a style of trading notable by many positions that are opened for extremely small and short-term profits.

Settled (Closed) Position - closed positions for which all needed transactions has been made.

Slippage - execution of order for a price different than expected (ordered), main reasons for slippage are � "fast" market, low liquidity and low broker's ability to execute orders.

Spread - difference between ask and bid prices for a currency pair.

Standard Lot - 100,000 units of the base currency of the currency pair, which you are buying or selling.

Stop-Limit Order - order to sell or buy a lot for a certain price or worse.

Stop-Loss Order - order to sell or buy a lot when the market reaches certain price. It is used to avoid extra losses when market moves in the opposite direction. Usually is a combination of stop-order and limit-order.

Support - price level for which intensive buying can lead to the price decreasing (down-trend).

Swap - overnight payment for holding your position. Since you are not physically receiving the currency you buy, your broker should pay you the interest rate difference between the two currencies of the pair. It can be negative or positive.

Technical Analysis - the analysis based only on the technical market data (quotes) with the help of various technical indicators.

Trend - direction of market which has been established with influence of different factors.

Unrealized (Floating) Profit/Loss - a profit/loss for your non-closed positions.

Useable Margin - amount of money in the account that can be used for trading.

Used Margin - amount of money in the account already used to hold open positions open.

Volatility - a statistical measure of the number of price changes for a given currency pair in a given period of time.

VPS (Virtual Private Server) - virtual environment hosted on the dedicated server, which can be used to run the programs independent on the user's PC. Forex traders use VPS to host trading platforms and run expert advisors without unexpected interruptions.