What is Forex? ::
Before one trades in the Forex Market one must understand what the Forex Market is Trading!
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This is a good place to start if you are new to the Forex Market. By making comparisons to the Stock Market, I will attempt to explain what you will be trading in the Forex Market

In the Stock Market you are buying shares of stock whereas in the Forex Market you are buying currency in "Lots" also referred to as "Contracts". Each Lot or Contract has a face value of $100,000 dollars.

Currencies are bought and sold in pairs. Each trade symbol has two currencies listed in the symbol. The currency listed first is the base currency representing what you are buying or selling. The second currency symbol is how much your paying for it when converted to that currency

For Example:

Symbol

What it Represents

USD/CHF Cost of 1 US Dollar in Swiss Francs.
USD/JPY Cost of 1 US Dollar in Japanese Yens.
EUR/USD Cost of 1 Euro Dollar  in US Dollars.
GBP/USD Cost of 1 British Pound in US Dollars

The Forex Market has a Bid and Ask Price, similar to that of the Stock Market. Therefore, assume the following using the symbol for the Euro Dollar vs. the US Dollar

EUR/USD

SIZE BID
1 1.2080
ASK SIZE
1.2081 1

Size = Number of "Lots" or "Contacts" being offered or sold.
           1 Lot = $100,000
           2 Lots = $200,000
           3 Lots = $300,000
Bid = The price you can sell at
Ask = The price you can buy at

This means:

I can buy 1 lot of the Euro for $120,810 US Dollars
or
I can sell 1 lot of the Euro for $120,800 US Dollars

Do not let those numbers scare you. You don't actually have to come up with that amount, but we will get into that further down the road.

In the stock market a tick represents movement in the price. In the Forex Market we call it a "Pip". You can make money by going Long on a position or Short.

In other words:

If I buy 1 Lot of the EUR/USD, I just took a Long position because I think the price will go up. When the price goes up I sell my 1 lot for a price higher than what I paid.

If I sell 1 Lot of the EUR/USD that I do not own yet, I just took a Short position because I think the price will go down. When the price goes down I buy 1 Lot at a lower price than what I sold at.

Now lets talk dollars and cents. How much money are you making with each Pip? A pip is the smallest measurement of movement in the Forex Market. It's value will vary with each different currency pair. You have two options now.

  1. Go to the glossary for the pip calculation formula

  2. Look at the chart below for the approximate amounts on major currency pairs

Symbol  

Value of Each Pip in either direction /lot

    x1 x2 x3 x4 x5
EUR/USD =  $10.00 $20.00 $30.00 $40.00 $50.00
USD/CHF =  $7.87 $15.74 $23.61 $31.48 $39.35
USD/JPY =  $9.17 $18.34 $27.51 $36.68 $45.85
GBP/USD =  $10.00 $20.00 $30.00 $40.00 $50.00
AUD/USD =  $10.00 $20.00 $30.00 $40.00 $50.00
USD/CAD =  $7.42 $14.84 $22.26 $29.68 $37.13
EUR/GBP =  $11.82 $23.64 $35.46 $47.28 $59.10
NZD/USD =  $10.00 $20.00 $30.00 $40.00 $50.00
GBP/JPY =  $5.02 $10.04 $15.06 $20.08 $25.10
These pip values were calculated based on the foreign exchange rates on June 24, 2005 at 12:58pm eastern standard time

So if I buy 5 lots of the EUR/USD at 1.2084 then sell all 5 lots at 1.2104 I would have made $1000.00 on that trade. Not a bad trade.

I would imagine your still asking yourself "How on Earth can I afford to buy 1 lot of currency of $100.000?"

Its called Leverage or Margin. For every $1.00 you put in, we will match it with $50.00, (50:1 Leverage). So an initial deposit of $10,000 allows you to trade $500,000 of currencies. And, NO...we will not let you trade to the point of having to be faced with a margin call. We have safe guards built into the system that will prevent you from loosing.

Is it really that simple?

Yes...PROVIDED you understand the risks! For a better understanding of the risks associated with trading in the Forex Market go to the Pros and Cons page.

 

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