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Introduction to Forex

The foreign exchange (Forex, FX) market is the arena in which a nation's currency is exchanged for that of another at a mutually agreed rate. It was created in the 1970s, when international trade transitioned from fixed to floating exchange rates, and the Forex market is now considered to be the largest financial market in the world because of its huge turnover.

All currencies are traded in pairs and each is assigned with an abbreviation (for example, GBP for a British pound, USD for a US dollar, JPY for a Japanese yen, etc).

The " base " currency is the first currency in the pair. The " quote " currency, or "term" currency, is the second currency in the pair.

Base currency Quote currency Rate
USD / JPY = 120.25

This abbreviation specifies how much you have to pay in the quote currency to obtain one unit of the base currency (in this example, 120.25 Japanese yen for one US dollar). The minimum rate fluctuation is called a point or a pip .

1 pip is 0.01 for currency pairs with JPY and 0.0001 for the rest of the pairs. Brokers offer fractional pips, that is why on your platform you will see five or three (for JPY pairs) digits after the point (0.00001/0.001).

The currency pairs on Forex are quoted as the bid and ask (or offer) prices:

  Bid Ask
USD / JPY = 120.25  / 120.28

Bid : The rate at which you can sell the base currency, in our case it's the US dollar, and buy the quote currency, ie the Japanese yen.

Ask (or offer): The rate at which you can buy the base currency, in our case the US dollar, and sell the quote currency, ie the Japanese yen.

Spreads: The difference between the bid and the ask prices.

Currency rate : The value of one currency expressed in terms of another. The fluctuation rate depends on numerous factors including the supply and demand on the market and/or open market operations by a government or by a central bank.

Lot: Usually contract size is based on a lot system, and for most currency pairs 1 lot is 100,000 units of a base currency.

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RISK WARNING: Trading in the foreign exchange markets on margin carries a high level of risk, and may not be suitable for all individuals. The high degree of leverage offered in the Forex markets can work against you as well as for you. Before deciding to trade in the foreign exchange markets you should carefully consider your investment objectives, you level of experience, and your risk appetite. The possibility exists that you could sustain a loss of some or all of your equity and therefore you should not invest money that you cannot afford to lose. Only true excess disposable cash should be used in trading. You should make yourself aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any questions or concerns as to how a loss would affect your lifestyle. Past performance does not guarantee in any way future results.

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