Top Ten Basic Terms in Forex Trading and Their Definitions
Forex refers to the foreign currency exchange market, the world’s largest financial trading market. Some terms that help a person understand Forex trading include:
Bid – to buy
Ask – to sell
Liquidity – financial ease of transaction, i.e. cash
Trading volume – the amount traded
Bid/ask spread – the difference between the proposed buying price and the actual selling price
OTC – over the counter
Exchange rate – the difference between currency values; for instance, a Canadian dollar is valued at .86 of a US dollar
Hedge funds – large mutual funds companies that control vast amounts of money and are able to manipulate the value of a currency through speculation
Central bank – the national bank of a nation, which usually exerts control over the value of that currency
Forex trading is in essence the investment in the currency of one country. Large international corporations that do business in many nations find value in keeping their cash reserves in a variety of nations, and holding their funds in a variety of ways. For example, a US company may have a percentage of its working capital in US dollars, but if it does quite a bit of business in Europe may also find it beneficial to keep a percentage of its money in Euros, in European banks. Many individual investors over the years have discovered that there is profit to be made in investment and speculation in the currency or forex markets.
As an example, during the 1970’s the German deutchmark was changing rapidly in value. It was worth anywhere from 1.7 marks to the US dollar to 2.5 US marks to the dollar. When the mark was worth 2.5 it was beneficial to spend dollars buying marks, since the mark would buy more goods or services at that rate. When the mark was only worth 1.7 to the dollar there was less incentive.
The forex market itself is not unified. There are many small forex markets specializing in trading various currencies. The most commonly traded currencies in forex trading are the US dollar, the Australian dollar, the British pound sterling, the Japanese yen, and the European Euro. The values of these currencies will vary depending on the market in which an investor is looking, so there is really no such thing as a single, unified dollar rate, but instead there are several dollar rates, which are different according to the market where the trade is occurring. The major cities in which trades occur are London, New York and Tokyo. This covers a 24 hour clock. When Asian trading ends, European trading beings, and when European trading ends, then American trading opens. Of course when American trading ends, it is time for Asian trading to open again, and so on.
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