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What Is Forex Trading?
What Does Forex Mean?
To answer that question, we need to break the word ‘Forex’ down. Did You know that Forex is actually a combination of two words? Well it is and those two words are ‘Foreign’ and ‘’Exchange’. Foreign Exchange is just one of the names that Forex goes by. It’s also known as FX and Currency Trading too.
So, now that we have cleared up what the word forex means, let’s look at exactly what it involves and why people love to trade it.
What Is Forex Trading?
The forex market is the largest market in the world with trading volumes measured in trillions of dollars. People from all walks of life trade the forex market, which basically means that they are buying and selling currency pairs like EURUSD and GBPUSD.
What are the most fundamental forex terms?
In every currency pair, the first mentioned currency is called base currency, while the second mentioned currency is called quote currency. In the pair EURUSD, EUR is the base and USD is the quote currency. If EURUSD=1.2000 this means that for 1 EUR You can get 1.20 USD on the market.
When You log in to any trading platform You will see two prices for each pair – Ask and Bid price. As a trader You “sell the bid and buy the ask price”. What? To buy a 1.0 lot of EURUSD You need to pay the Ask price. If You then want to sell this lot – You will need to sell it for the Bid price. The terminology comes from the fact that the market players interact with each other on the market by buying and selling currency on the market. When a bank is prepared to buy EURUSD the bank bids and You sell. So “You sell the bid”. The Spread will then be the difference between the Bid and Ask price of a pair.
Let’s review this example. If You expect the EURUSD to increase in value, You can buy (also known as a ‘long’ position) EURUSD. By buying EURUSD You are investing in the likelihood of the EUR to appreciate in value against the USD. If You buy EURUSD at 1.1800 and sell (also known as a ‘short’ position) when the pair price is 1.2000 – You will be on 2 cent profit (per euro).
But how would You know how much You are buying? The Forex trade volume is measured in lots. You select this volume at the point of opening the position at Your MT4 platform. The standard lots sizes are:
- Standard lot (1.0) = 100,000 units of base currency
- Mini lot (0.1) = 10,000 units of base currency
- Micro lot (0.01) = 1,000 units of base currency
Therefore, if You buy (long) a standard lot of EURUSD You are buying 100,000 EUR. But how much will You need to invest? Well here comes the leverage. If You choose leverage 1:1 You will need to pay 100,000 EUR for Your 1.00 lot EURUSD and You will need to have even more funds in Your account to allow for possible decrease of the pair price against Your expectations. Don’t worry, GBE brokers offers a negative balance protection and You can’t possibly loose more than Your investment. Let’s explore a scenario with a leverage of 1:100 instead for instance. In this case You will need to invest 1,000 EUR to purchase 1.0 lot EURUSD. While leverage allows You to purchase more for Your money – this presents You with a much higher level of risk to Your invested capital. This is why leverage above 1:50 is offered only to experienced traders.
The best way to learn how the markets work is to see them in action on our risk-free demo.