FOREX (Foreign Exchange Market)

Foreign Exchange Market is the arena where a nation's currency is exchanged for that of another at a mutually agreed rate. FOREX market has been formed in 70th, when international trade has changed from system of fixed rates to system of floating rates of exchange.

In fact, every national currency is merchandise, like wheat ore sugar, the same medium of exchange, like gold and silver. Since the world changes every year faster and faster, that economic conditions of every single country (labor productivity, inflation, unemployment and so on.) depend on level of development of another countries more and more, and this, in turn, impacts on value of its currency regarding currencies of another countries. This is the main reason of the process of rate fluctuations.

Currency Symbols

EUR Euro
USD US Dollar
GBP British Pound
JPY Japanese Yen
CHF Swiss Franc
AUD Australian Dollar
CAD Canadian Dollar
NZD New Zealand Dollar
SEK Sweden Kronor
DKK Denmark Kroner
NOK Norway Kroner
SGD Singapore Dollar
ZAR South Africa Rand

Currency Exchange Rate

Currency exchange rate is simply the ratio of one currency valued against another. For example, "EUR/USD exchange rate is 1.2505" means that one euro is traded for 1.2505 dollars.

The exchange rate of any currency is usually given as a bid price (left) and an ask price (right). The bid price represents what has to be obtained in the quote currency (US Dollar in our example) when selling one unit of the base currency (Euro in our example). The ask price represents what has to be paid in the quote currency (US Dollar in our example) to obtain one unit of the base currency (Euro in our example). The difference between the bid and the ask price is referred to as the spread.

1.0 lot size for different currency pairs (Table 2)
Currency 1.0 lot size Necessary margin for 1 lot 1 pips
EURUSD EUR 100,000 1000 EUR 0.0001
USDCHF USD 100,000 1000 USD 0.0001
GBPUSD GBP 70,000 700 GBP 0.0001
USDJPY USD 100,000 1000 USD 0.01
AUDUSD AUD 200,000 2000 AUD 0.0001
USDCAD USD 100,000 1000 USD 0.0001
EURCHF EUR 100,000 1000 EUR 0.0001
EURJPY EUR 100,000 1000 EUR 0.01
EURGBP EUR 100,000 1000 EUR 0.0001
GBPJPY GBP 70,000 700 GBP 0.01
GBPCHF GBP 70,000 700 GBP 0.0001
EURCAD EUR 100 000 1000 EUR 0.0001
EURAUD EUR 100 000 1000 EUR 0.0001
NZDUSD NZD 200,000 2000 NZD 0.0001
USDSEK USD 100,000 1000 USD 0.0001
USDDKK USD 100,000 1000 USD 0.0001
USDNOK USD 100,000 1000 USD 0.0001
USDSGD USD 100,000 1000 USD 0.0001
USDZAR USD 100,000 1000 USD 0.0001
CHFJPY CHF 100,000 1000 CHF 0.01

Let's assume that exchange rate for EUR/USD is 1.2505/1.2509. You may have made market analysis and decide the EUR/USD rate is moving higher (at least to 1.2600). You buy 0.1 lot (minimum contract size) of EUR/USD at the 1.2509 (ask price). Table 1 will help you to define what the contract size is: i.e. 1.0 lot for EUR/USD is 100 000 EUR, then 0.1 lot (our contract size) is 10 000 EUR.

This means that you bought 10 000 EUR and sold 10 000*1.2509=12,509 USD. So, in order to make a deal you don't

have to sell total amount of 12.509 USD but 100 times less just $125.09. The rest sum of the money (in our example $12,383.91) is leveraged to you by a broker (a company you entered the contract with to enter the market).

Source: www.articlecity.com