The foreign exchange market also known as forex market is the place where currencies are traded. If you are thinking what’s the need to do this, then the answer is to do global businesses. For instance, if you are a citizen of Australia and looking to buy an article from Italy, then either you or the company through which you are shopping will have to pay in Euros to its manufacturers. The same applies to traveling, i.e., being an Australian you can't pay in dollars when you are visiting an Asian nation because it's not the locally accepted currency.
One unique aspect of this currency exchange market is that it is conducted electronically over-the-counter(OTC). There is no central marketplace for this purpose, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney. Unlike five-day week, forex market remains open 24 hours a day, five and a half days. Well, being a student of economics, if you are looking forward to making a career in this field, then you need to study the various laws, policies, and regulations around it. But before learning the techniques to trade there, it’s important for you to understand some of the basic terminologies that you will encounter.
The following is a short list of some extremely basic terms created by our economics assignment help experts that no one trading in forex market can stand to be ignorant of:
This term refers to the quotation of the relative value of a currency unit against that of another country in the forex market. There, one can trade currency with any other. For example, one can exchange US dollars with Japanese yen, or Euros with Great British pounds. Well, there is no unilateral standard for knowing the worth of these currencies as they keep on moving upward and downward against one another.
The spread is the difference between the bid or buying price of a currency and its ask or selling price. Every transaction in forex market is conducted through intermediaries who charge for their services. And, this fee is called the spread. While trading, you watch the numbers in your currency pair. If the currency you hold has a higher value than that of the one you are about to trade for, you will make a profit, and in the reverse case, you will meet a loss.
PIP is the abbreviation for point in percentage, which refers to a very small amount of change in a currency pair. It is the smallest value by which a currency quote can change. You must have noticed two currencies having four digits to the right of decimal point. The furthest digits in those values is called PIP. One PIP of difference between two currencies may represent only a tiny amount of money, but it has the ability to cause greater volatility in its values.
It refers to the use of credit or margins to trade currencies in the forex market. You can understand it by an example- suppose you want to invest in a currency but lack sufficient money. In that case, you can borrow that amount from a broker, and this is called leverage.
Margins are the loans extended by the brokers to investors, which allow them to trade a large amount of money without investing as much. Sometimes, market becomes stagnant, and many big players lose confidence, which finally leads to a margin call. In this situation, everyone who is trading on margins has to return all the money they have borrowed.
Long Versus Short
Unlike a stock market, in the forex World, keeping a position for more than a week is considered as a long period. Generally, a trader does not hold a currency for more than a day or two, and sells it even when there is a slight chance of profit.
To trade in the forex market, it’s mandatory to have a good command of these basic terms. Besides this, if you are interested in making a career in this field, then you learn the trading strategies from industry experts.