Foreign Exchange

If you want to make money in the Forex Market you have to be able to predict where the price is going. The more accuracy you have in predicting how the price will change, the more you will earn. Your profit is measured in pips. Pip (or Piont) represents the smallest incremental move an exchange rate can make. It is one one-hundredth of a percent. For example, when a currency moves from 1.5720 to 1.5725 it has moved 5 pips. That means that you've won or lost 0.0005% of the money you invested in that trade. However trading for such profits is not worthy. That's why forex brokers introduced leverage. Most common leverage is 100:1. That means that for every pip you win or lose you will win or lose 0.0001%*100=0.01% of your investment.

The Foreign Exchange market, also referred to as the "Forex" or "FX" or "Spot FX" market is the largest financial market in the world, with a volume over US$1.95 trillion -- 30 times larger than the combined volume of all U.S. equity markets. If you compare that to the $25 billion a day volume that the New York Stock Exchange trades, you see how giant the Foreign Exchange really is. It's actually more than three times the total amount of the stocks and futures markets combined!

"Foreign Exchange" is the simultaneous buying of one currency and selling of another. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

There are two reasons to buy and sell currencies. About 5% of daily turnover is from companies and governments that buy or sell products and services in a foreign country or must convert profits made in foreign currencies into their domestic currency. The other 95% is trading for profit, or speculation.

For speculators, the best trading opportunities are with the most commonly traded (and therefore most liquid) currencies, called "the Majors." Today, more than 85% of all daily transactions involve trading of the Majors, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy compared to the other countries' economies.