Basic Terms in Forex

Trading currency in the foreign exchange market (forex) is fairly easy today with three types of accounts designed for retail investors: standard lot, mini lots and micro lots. Beginners can get started with a micro account for as little as $50.

Before you start jumping in you should familiarize themselves with the market and terminology of the forex market, and if you’ve already been trading stocks online it should be easy to get started.

Below is a list of terms you should learn.  

PIP:   The smallest price change that a given exchange rate can make. Since most major currency pairs are priced to four decimal places, the smallest change is that of the last decimal point. A common exception is for Japanese yen (JPY) pairs which are quoted to the second decimal point.

BASE CURRENCY: The first currency quoted in a currency pair on forex. It is also typically considered the domestic currency or accounting currency.

Market Making

Since most Forex deals are made by (individual and organizational) traders, in conjunction with market makers, it’s important to understand the role of the market maker in the Forex industry.

What is a market maker ?

A market maker is the counterpart to the client. The market maker does not operate as an intermediary or trustee. A market maker performs the hedging of its clients positions according to its policy, which includes offsetting various clients positions, and hedging via liquidity providers (banks) and its equity capital, at its discretion.

The advantages of fixed and floating exchange rates

Advantages of fixed exchange rates

Fixed rates provide greater certainty for exporters and importers and, under normal circumstances, there is less speculative activity – though this depends on whether dealers in foreign exchange markets regard a given fixed exchange rate as appropriate and credible.

Advantages of floating exchange rates

Fluctuations in the exchange rate can provide an automatic adjustment for countries with a large balance of payments deficit. A second key advantage of floating exchange rates is that it allows the government/monetary authority flexibility in determining interest rates as they do not need to be used to influence the exchange rate.

Who are the participants in today’s Forex market?

In general, there are two main groups in the Forex marketplace:

Hedgers account for less than 5% of the market, but are the key reason futures and other such financial instruments exist. The group using these hedging tools is primarily businesses and other organizations participating in international trade. Their goal is to diminish or neutralize the impact of currency fluctuations.

Types of Exchange rate Systems

An exchange can operate under one of four main types of exchange rate systems

Fully fixed exchange rates

In a fixed exchange rate system, the government (or the central bank acting on its behalf) intervenes in the currency market in order to keep the exchange rate close to a fixed target. It is co

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