When we talk about Forex, it is quite different from other capital markets. Forex stands for Foreign Exchange. The Important thing to know about how forex pairs trading?
What is Forex: Forex is the relative value of one currency versus the other currency. Exchange rates are normally carried out till the fourth or fifth place. Let me give you an example to understand Forex. Suppose you are going for a vacation from the USA to India. The current Forex rate (at the time of writing this) is
This means you need to pay INR 66.80 to buy a dollar. This is called currency pairing. The currency on the left-hand side is the base currency and the currency to the right-hand side is called counter currency. The base currency is always taken to be 1 unit.
While we see the in most cases, USD is taken as the base currency, but there are some exceptions to this as well. The Major exception to this is GBP, AUD, and EUR.
What is cross currencies: There are some currency pairs which do not involve USD at all. These are called cross currencies. The most common cross currency pairs are the EUR/CHF, EUR/GBP and EUR/JPY. While these do exists, but these are not actively traded.
Bid & Ask Price: Bid Price is nothing but which reflects how much of the quoted price will be obtained while selling 1 unit of base currency. Ask price is the price at which you can buy the currency
Let me give you an example for better understanding.
Here Bid=66.8091 Ask price=66.8095
If you wish to buy the base currency, you need to pay 66.8095 to the market to buy 1 USD (base currency).
If you wish to sell this currency, you need to deal on Bid Price, which is 66.8091 in this case.
Spread and Pips: The difference between bid price and ask price is the spread. The spread in the case I mentioned for USD/INR is .0004(66.8095-66.8091). This figure looks small but it is of immense importance when millions of dollars are at stake in the market.
Pip is the smallest change a currency can make. 1 pip in the forex market is equal to .0001.
While Forex trading for most people means making money, big companies sometimes use forex to make a future purchase. Also, investing money can be risky sometimes. Invest only when you have knowledge of everything!