20 Jul A Primer on Forex Trading

What is Forex?

The Foreign Exchange Market is also known as forex or you may have heard it being called FX. It is the largest market in the world and on a daily basis trades amounting to trillions of dollars are conducted worldwide.

Forex trading as an investment works like any other financial vehicle – you want to buy at a lower rate and sell at a higher rate. The only difference here is that you are essentially buying one currency using another, with the end goal of selling the currency you bought at a higher rate than what you paid for it.

Understanding the lingo

As mentioned before, the essence of forex trading is that you are buying one currency using another. Therefore, the currencies you will see are always written in pairs. They are represented using a three-letter code such as AUD/USD (Australian dollar to American dollar) or JPY/EUR (Japanese Yen to Euro).

The first currency in the pair is known as the base currency. The second one is called the counter currency or quote currency. When you wish to buy, the quoted price is the amount in the quote currency to purchase one unit of the base currency. For example, if you see EUR/JPY = 117.3910, then it implies that you can buy 1 euro for 117.3910 yen.

A major difference as compared to stocks is that you may see currencies being quoted up to four decimal points as opposed to stocks which are usually written up to two points. In forex trading lingo, all currency quotes follow the unit of a pip. This is an acronym for percentage in point, and it is the represents the smallest price change of a currency pair. A pip is measured at one ten-thousandth of a point due to the fact that all currencies are quoted up to four decimal places. So, if EUR/JPY went from 117.3910 to 117.3913, it has moved three pips.

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