Any basic Forex information would not be full without explanation of what Forex means. Forex market or sometimes called as FX stands for a foreign exchange market (also known as “currency market”) where people – traders and brokers – are involved into buying and selling world currencies against each other. At the moment a lot of people join Forex market as traders due to great popularity and huge financial base and opportunities this market can offer even if comparing it with stock exchange markets. Besides approximate daily trade results which Forex and related markets show are really impressive –more than 3 trillion USD – which is over all results of all U.S stock markets. Due to the fact that trading at Forex market can be conducted all over the world by means of the Internet and other communication means like fax and phones Forex trading is also considered as one of the most convenient and easy to use ones comparing with stock markets.
If you want to start your Forex education in a correct way you need to learn to distinguish Forex market and stock market scemes of work because many newbies suppose by mistake that these two markets work basing practically on the same principles and using the similar tools and instruments. There are plenty of differences but only two of them denote the evident dissimilarity between these types of markets:
1) Difference in trading hours.
The main advantage of Forex market is that it works 24/7 without breaks and day offs. Forex information and trading itself can be provided from three continents from a lot of big cites like Tokyo, London, New York, Zurich and many others which allows following and reacting in a proper way at various and fast fluctuations happening at Forex market. As for the stock markets – they open at Sunday night and close on Friday evening.
2) Commissions can be different.
Online electronic Forex trading and high competition created circumstances making possible reducing in bit-off spreads (equals to stock commissions). Such spreads cover all those risks which are inevitable when one deals with the market makers. Many people find Forex spreads rather low but any spread can rise if the currency liquidity drops due to some reasons. Besides such Forex commissions considered as the lowest ones according to trade sizes comparing with stock markets in spite of the fact that lately FX commissions have been reduced. In the most Forex trading houses leverage is offered as 100 to 1 (for example a trader who can suggest a deposit fund of 10 000 USD can leverage this sum up to 1 million USD). Such situation involves interference of speculators who can narrow a pip spread but government and the hugest banks impact on prices and commissions as well so the chances are equal. Besides never heed that stock markets offer all participants involved into trading an equal level of an access and practically the same prices while the Forex market suggests few totally various levels of an access where commissions and spreads differ from every next level. The hugest investing banks involved into Forex trading can offer the lowest spreads.
Why spreads are so important in Forex trading?
Any initial Forex information presupposes explanation of spreads functions and meaning. To explain what is a spread we need to appeal to such terms as the BID price and the ASK/OFFER price. The BID price means the price at which a trader can easily sell one unit of any base currency offered at the Forex market (or buying one of secondary currencies) and the ASK/OFFER price stands for the price used by a trader for buying a unit of one of base currencies. The following example explains this in practice – if the exchange rate of the currency pair EUR/USD equals to 1.3473/1.2476 it denotes that a trader should pay 1.2476 USD to buy one Euro (which is obviously a base currency) and if a trader sells one Euro he will get 1.3473 USD. You see, it is not so hard to figure out. As you have noticed the BID price was lower than the ASK/OFFER price and that tiny difference between these two prices is called a spread which is measured in “pips” (1.2476 – 1.3473 = 3 pips) and in such way denotes the possible profit and the dealing room used in the Forex trading houses.
And the last piece of Forex information we want to discover deals with retail Forex trading. The mentioned before market makers or also known as retail Forex brokers work representing retail customers and capture one of the smallest niches of the Forex market. Due to the dry statistics data – retail Forex broker is responsible for estimation of the total volume of retail trading which equals up to 50 billion per day (around two percent from the total value of the whole Forex market). However this segment shows a tendency to grow lately because of appearing high quality Forex trading platforms and individual