FOREX: The Basics of the Currency Market

FOREX (or FX/currency market) is the largest market for investment yet, with a daily turnover of trillions of American dollars. In comparison, the famous New York Stock Exchange has less than US$30 billion in daily circulations. It used to be a playground mostly for professional traders till the recent years, when the retail traders discovered this market to reach their investment heights.

How FOREX Works

The currency market works in sessions for 24 hours, except the period from Friday evening to Sunday evening, because even currencies need rest. There is a total of three sessions covering the globe: the European, US, and Asian. As they overlap, the volume of a particular currency increases. Time zones and overlaps may be misleading, but it’s quite possible to get used to them and choose the best time for a certain currency pair.

The trading is handled in micro-, mini, and standard lots:

  • A micro-lot is 1,000 units (of a currency your account is based on);
  • A mini lot is 10,000 units;
  • A standard lot is 100,000 units.

Pairs and Pips

The trading on FOREX is only done in pairs, which means you have to sell one currency in order to buy another one. This is the biggest difference between the currency market and the stock market where one is able to purchase or sell one stock. Also, all the ‘lots’ are priced to the fourth decimal point with a pip of 1/100 of one percent. (A pip is the smallest measure of increasing in FX).

In micro-lots, a pip is only 10 cents, which is safer when you’re to lose but won’t bring you a lot of gains. A mini lot’s pip is 1 unit, and a standard lot’s one is 10 units. In one session, certain currencies can gain or lose up to 100 pips, making the stakes for the holders of standard lots much higher.

FOREX is usually limited to only 18 currency pairs, while other may be available. The most popular lots to trade are:

  • Euro (EUR);
  • British pound (GBP);
  • American dollar (USD);
  • Canadian dollar (CAD);
  • Swiss franc (CHF);
  • Australian dollar (AUD);
  • New Zealand dollar (NZD);
  • Japanese yen (JPY).

Fewer trading pairs make it easier to manage and navigate one’s account.

It’s quite a tricky market, especially if you’re a beginner. However, it has its conveniences like micro-lots and smaller amount of pairs. As more retail traders join FOREX, the knowledge of the proper usage is becoming more easily-obtained. So, if you want to start making money like the big guys, make sure to get some more in-depth look into the currency market.

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Tim Spafford

Tim Spafford

Tim is a student who works hard to get a degree in finance and build a successful career in business consulting. Being a student and living in London Tim has a real-life experience in budgeting, saving, money making, traveling and having fun.