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Forex basics

Forex is a large liquid financial market that is open and operates 24 hours a day during the weekdays. The goal is to simulate the transactions of one currency for another. It is very important to know the basics of Forex before you start trading.

The spot market is the market for both buying and selling currencies at the current market rate. The spot market is due for settlement within two business days; which is also called the value date. The rollover is often based on the interest rate differential between two different currencies in a particular transaction. The way it works is if you are long or bought the currency, the one with higher interest rate, then you will earn interest. If you are short or you sold the currency you will have to pay the interest. The exchange rate is the value of one currency compared to another currency. For example, one Euro is worth 1.2954 U.S. dollars. The first currency is the par and is called the base currency and the second currency in the pair is known as the counter currency. The way it works is that two different currencies make up the exchange rate; and when one is bought the other is sold.

Futures Commission Merchant is an organization that is licensed by the United States and hence their name, they deal with products that come out in the future. They are the ones that accept money from the clients to ultimately trade them. The market maker sets the pricing for all the currencies and will always buy or sell currencies for that quoted price. The Electronic Communications Network (ENC) provides a place where all the market makers, like banks and traders can enter bids on any of the currencies. A dealing desk is then used because it provides the pricing and liquidity, it also executes trades. The other side of the coin is a no-dealing desk and this is when a broker uses external liquidity to provide the pricing for clients.

Counterparty stands for one of the participants that are involved in the transaction. Whenever you are involved in transaction the sell quote is the price in which you can see the base currency and is always displayed on the left. The buy quote is the price in which you can buy the base currency and is displayed on the right. The spread is the difference between the sell quote and the buy quote or it could be the bid and the offer price.

The pip, sometimes known as points, is the smallest price increment a currency can make. Along the same lines, the pip value can be either fixed or variable and it depends on the currency pair. The margin allows you to open or maintain a position and they can either be free or used. A used margin allows you to maintain or open a positions and a free margin is the amount available to open new positions. Leverage puts your account into a position which is greater than your total account margin.

These are definitely the basics of forex and are things you should know before trading on Forex.

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