We are sure you have heard of stocks and bonds and many of you must have already done that. We welcome you to the world of forex trading. Let's see: what exactly is forex?

Forex Market

The word Forex is an acronym (loose acronym) for Foreign Exchange Markets or simply forex market. It started off somewhere in the 1970s. What then is a forex market? Forex market is simply a place where money is sold and bought depending upon the price of one currency against the other as set out by the forces of supply and demand. But don't worry. Unlike stocks and bonds it is not a manipulative market.
In forex you don't actually have to buy a currency first in order to sell it. What you do is "open a position" to either buy or sell a currency. How do you do that? It is by first opening a forex trading account with a forex market broker. When you open a forex trading account with a forex market broker, in effect you would be getting a web-based account that you could access anytime with a unique login and password. Once you login to your account, you could then buy and sell any currency.

Major Currencies & Quotes

The most important major currencies traded in Forex and what you will be getting to see on your trading screen are the Euro (Eur), Japanese Yen (JPY), British Pound (GBP) and Swiss Franc (CHF). All these currencies are traded against the US dollar. In your trading account, you will always get to see foreign exchange quotes in currency pairs. It is important to know the basics of currency pairs and here are a few examples.
USDJPY= the cost of $1 in Japanese Yen.
EURUSD= the cost of euro 1 in US dollars.
GBPUSD= the cost of 1 GBP in US dollars.
Quotes are expressed in the units of the second currency for a unit of the first currency. For example if you see a quote of USDJPY being 110.10 it simply means $1 costs 110.10 Japanese Yen. Similarly if you see a quote EURUSD 0.8432 it simply means that 1 Euro costs 0.8432 US dollars.
To understand forex, you have got to understand the principles of margin trading. Forex trading is all about first opening a forex trading account with a broker in US Dollars or Pound Sterling and then using it to buy and sell other currencies using the principle of what is called margin trading.

What then is margin trading & Lot?

Margin trading means, in reality, using borrowed capital. Let's explain it. Don't get overawed with the word margin trading! The basis of margin trading is a mechanism called "lots". One lot simply equals $ 100,000. The beauty is you don't need to have that amount of money to buy one "lot". All you need is 0.5% to 4% of the sum, and you could do that by having an Internet based forex trading account with a recognized broker. That is the margin part of margin trading.
Now you know what a "lot" means. You also know what margin trading is. But you don't know how margin trading works. To understand that, you must know what a "pip" is.

What is a "pip"?

Be sure to remember what we tell you about this "pip". It is something you will hear day in and day out in forex. A "pip" literally stands for percentage in point. It is the smallest increment in any currency pair. For example, in EUR/USD a movement from 0.8540 to 0.8541 is one pip. So one pip for this currency pair is 0.0001. Similarly for USD/JPY a movement from 110.10 to 110.11 is one pip, so a pip is 0.01.

As you now know what a pip is, it is time to look at an example of margin trading. Assume for a moment that you have analyzed the situation and you believe that the pound would go up against the dollar. So what do you do? You decide to open 1 lot for buying the pound (GBP) with the margin 1%. Of course you could select a higher margin say 2%. But for this example, we will take the margin as 1% that is a leverage of 1:1000. Consider for a moment that you bought this one lot of GBP when the price was 1.30000. All you do now is wait for the exchange rate to go up. The point is, you win if it goes up. You loose if it comes down. But today is your lucky day. The price has gone up to 1.30141 and you straightaway earn 14 pips. But for now, lets leave it to another day, as we will get to learn more of the intricacies of forex trading in a subsequent article titled "Explaining the forex quote"