The Main Concepts of the FOREX Market

In banking practice there are special code abbreviations: for example, the exchange rate for the US Dollar against the Japanese Yen is referred to as USD/JPY and the British Pound against the US Dollar is referred to as GBP/USD.

The first currency is known as the base currency and the second as the quote currency:

This notation specifies how much you have to pay in the quote currency to obtain one unit of the base currency (in this example, 120.25 Japanese Yen for one US Dollar). The minimum rate fluctuation is called a point or pip.

Most currencies (except USD/JPY, EUR/JPY and GBP/JPY, where a pip is 0.01) use 4 decimal places, i.e. 0.0001.

The currency pairs on FOREX are quoted as bid and ask (or offer) prices:

Bid

Bid is the rate at which you can sell the base currency, in our case it is the US Dollar, and buy the quote currency, i.e. Japanese Yen.

Ask (or offer)

Ask (or offer) is the rate at which you can buy the base currency, in our case US Dollars, and sell the quote currency, i.e. Japanese Yen.

Spread

Spread is the difference between the 'bid' and 'ask' prices.

Margin trading

Margin trading assumes that FOREX dealing is based on the margin, the collateral, and the provided leverage.

Such credits are provided by the brokerage companies, in addition to their informational services, and make it possible for a trader to enter into positions larger than his/her account balance. This collateral is typically referred to as margin.

Margin

Margin is the sum of a guarantee pledge under which leverage is provided.

Leverage

Leverage is the term used to describe margin requirements. It is expressed as the ratio between the collateral and borrowed funds, i.e. 1:20, 1:40, 1:50, 1:100.

Leverage of 1:100 means that when you wish to open a new position you need just 1/100th of the contract size in available capital. 

Currency Rate

Currency Rate is the ratio of one currency valued against another. It depends on the demand and supply within a free market or a market restricted by a government or central bank.

Lot

Lot is a fixed standard amount of a given currency for the purpose of trading. Sometimes it is known as the contract size. The monetary value of 1.0 lot for each currency pair is listed in Table 2.

Storage

Storage is the charge to rollover (hold) a position overnight. It can be either positive (credited) or negative (debited) to your account balance depending on the interest rates in the countries of the currencies you are trading.