Foreign exchange market operates by trading one



type of currency against another. Unlike other

financial markets, the market has no physical

location and no central exchange. It operates

through a global network of banks, financial

institutions, and individuals. The forex market

is emerging as the world's largest financial

market, operating round the clock with enormous

amounts of money traded on a daily basis.

Another major difference between forex market and

other financial market is that in forex,

investors can respond to currency fluctuations

caused by economic, political and social events

immediately, without waiting for the exchanges to

open. Modern news services, smart online charting

services, electronic forex trading platforms,

signal services exploded the forex market and

opened it for even small and medium traders and

investors.

In the foreign exchange market 6 major currency

pairs are traded the most, which accounts for

almost 90% of the daily trading activity. They

include:

1. EUR/USD = Euro versus U.S. Dollar

2. JPY/USD = Japanese Yen versus U.S. Dollar

3. USD/CHF = U.S. Dollar versus Swiss Franc

4. AUD/USD = Australian Dollar versus U.S. Dollar

5. GBP/USD = British Pound versus U.S. Dollar

6. USD/CAD = U.S. Dollar versus Canadian Dollar

When reading these forex quotes we have to look

at the bid price which is the highest price for

buying versus the ask price which is the lowest

price to sell. The first currency of the pair (

EUR/USD) is known as the base currency and has

the value of 1. If the bid of the Euro versus U.S.

Dollar is 1.2811, it means that for buying one

Euro we have to pay $1.2811.

When the bid and ask prices moves in an uptrend,

it suggests that the secondary currency is

getting weaker and the base currency in turn is

getting stronger. They go up or down by units

known as pips or price interest point which is

almost identical to a tick in a stock price. It

is the smallest increment and a move from $1.2811

to $1.2821 is a 10 pip move upwards.

When trading the pairs, we should think in terms

of the base currency for buying and selling. If

we were to buy (long) the EUR/USD, it means that

we bought (long) the euro, hoping it to go up,

and selling (short) the dollar, hoping it will

fall. If we were to sell (short) the EUR/USD, it

means that we sold (short) the euro, hoping it to

fall and in turn buying (long) the dollar hoping

it to rise. There are different types of

transactions in the forex market. They are Spot

transactions, Forward transaction, Futures,

Options, and Swap.

In the Foreign Exchange markets we trade in lots,

which are in increments of 10,000s:

1 lot=10,000 units

2 lot=20,000 units

3 lot=30,000 units

The minimum one can purchase is 10,000 units of a

certain currency pair. For example, if we were to

buy 3 lots of the EUR/USD with the bid price at 1.

2811, we would spend $38,433 (30,000 ´ 1.2811= 25,

622). With buying 3 lots this means for every pip

that it goes up you make $3. So with movements of

some of these pairs, it's possible to generate

considerable profits.

It is important to remember that high risks

accompany any investment like forex market has

the potential for great returns. Proper knowledge,

studied information and risk management measures

can help the investors gain profit without the

fear of losing in their trade.