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What is Forex?

Forex - FOReign Exchange –Forex market is a financial market where participants may execute currency purchase and sales transactions according to the marketing rates.

Forex unites the banks participants which conduct deals for currency purchase and sale between themselves every day. Transactions volume per day exceeds 3 billion of US Dollars and keeps up trades during the working week.

What is Forex? You should understand that Forex is not an exchange in the proper sense of the word because it does not have location as New-York or London exchange. Trades are held 24-hours a day, they are regularly conducted regardless of the time.

Trading at Forex is carried out by means of the telephone or special PC programs – trading terminals.

History of the world currency market Forex

In the beginning of the 20th century people do not have an opportunity which we have now.
To buy or to sell a currency or a share at stock was much more difficult; it took more time and required solid capital.

The date of the Bretton Woods Agreement signing (1944) became the starting point in the history of the currency market development. This Agreement was signed by the leading economic states.

It was decided to fix exchange rates (create a stabilizing international currency, US Dollar), and oblige all countries to maintain it.

The matter was that after the Second World War many countries had a demand for American goods and this lead to the rapid US Dollar rise against other currencies.

Having signed this agreement the world community escaped serious economic crises.

Floating rate

Eventually, when the world recovered after the Second World War and the necessity to control the rate significantly decreased the Bretton Woods Agreement was no longer in force.

It began in 1971 and by 1973 all countries ha? fully convertible currencies which rates were specified by the market mechanisms.

Forex and modern life

With the computer, clearing bank equipment and internet development the era of the modern Forex market came. Nowadays it is enough to have a computer and special program (for example, MetaTrader4) and access to the Internet.

Traders from all over the world execute operations staying in the office, at home or on vocations. New technologies allow people to work at Forex remaining independent and free.

Basic terms and currencies

Basic currencies:

  • EUR EURO
  • USD US Dollar
  • GBP Great Britain Pound
  • JPY Japanese yen
  • CHF Swiss franc
  • AUD Australian dollar
  • CAD Canadian dollar
  • NZD New Zealand dollar
  • SEK Swedish krona
  • DKK Danish krone
  • NOK Norwegian krone
  • SGD Singapore dollar
  • ZAR South African Rand

Currency pair

The cost of one currency against the other is called currency pair.

For example, EURUSD

At the first place there is EUR – it is a basic currency against US Dollar. US Dollar takes the second place and is considered to be a quoted currency.

There are a lot of currency pairs. The most actively traded currencies are EUR, USD, GBP, JPY, CHF and etc.

The list of the currency pairs which are available for trading is here.

Currency rate

Currency rate determines the cost of one basic currency unit denominated in the quoted currency.

If, for instance, we see the rate 1.3050, it means that 1 EURO costs 1.3050 US Dollars.

Spread

There can not be one price for purchase and sale at Forex as well as at the other financial markets.

There are purchase price – ASK and sale price - BID.

The difference between ASK and BID is traders’ payment for the deal execution (spread).

If a trader buys at a price 1.3050 (ASK), a sale price (BID) will be lower, for example, 1.3048.

That is why a trader has to wait until the rate increases by 3 pips and more in order to make profit.

Swap

Swap is a payment for the long-term deal which is carried over the midnight.

The matter is that all world currencies are connected with the certain state or union. Central banks have different lending rates for the commercial banks.

That is why the most attractive currency for investment is considered the one which has the highest lending rate.

Swap is calculated on the basis of two parameters: bought currency and its rate the other currency. Swap may be both negative and positive.

For example, a trader buys US Dollar for Japanese yen.

The lending rate of the American Bank 5,25%, and Japanese 0,75%.

A trader has to pay swap in the amount of about 1 pip (depends on a brokerage company).

If a trader holds a deal for 10 day, he will pay for each day.