The term forex is used to refer to the foreign exchange market which is concerned with the trading of currencies. At present forex trading is also possible online. Various factors have influenced the popularity of forex trading over the years and currently the daily forex trading ensures profits of about trillions of US$. Currency trading is influenced by various factors.
There are several economic and political factors which play a very important role in determining the market forces. For example economic recession, inflation, trade deficits, bank rates etc govern the forex trading markets. In case of currency trading, a vital deciding factor is the exchange rate or the relative value of the currency.
Each currency has its own standing in the world and the rates at which they are comparable with the currency of a foreign nation are popularly referred to as relative value or the exchange rate.
Factors for determining exchange rates
It is to be noted that in the forex trading markets, the exchange rate is determined by a wide range of factors which makes its functioning much more relaxed compared to the rigidity of the rates if imposed by a centralized authority.
For the sake of trading in foreign exchange there are certain key terms that have to be defined. The most important constituent of forex trading is definitely the ‘quote’ which refers to the quoted rate and the quote must be mentioned after extensive study and research to ensure that losses are minimum.
Pips - percentage in points
While discussing this aspect, it should be noted that while dealing with quotes the prices are expressed in terms of what is known as ‘pips’. Pips here may be defined as the percentage in points and it may be ascribed as 1/100th of 1%.
In case of currency trading, there are two currencies that are taken into account for this purpose and therefore the currency which is listed first is referred to as the ‘base currency’. It must always be remembered that the base currency should always have to be assigned the value of 1.
It is against this value that the evaluation of the other currency is to be made. There are also some other key terms like ‘bid’ which may be defined as the price at which the base currency may be sold while buying the other currency. On the other hand, the term ‘ask’ refers to the price at which the base currency may be purchased by selling the other currency.
Leverage
For the various investors who are interested in trading in forex, ‘leverage’ is a key term which is ratio of the amount which has been deposited to that of the amount which is required to be traded. It is a vital factor as it thus enables the traders to submit smaller amounts while trading in larger amounts.
The amount of money which therefore has to be deposited prior to trading is referred to as the margin. In fact for amateur traders, the margin is the primary requirement in order to initiate a forex trading account. Before investing in forex trading, one must analyze the trends in the forex market with the help of forex analysis.
