Forex trading has emerged as a very profitable and lucrative with inherent risk trade market. However in this market the trading is usually done in currencies. Several companies have registered huge profits through forex trading. In simple words forex trade is defined as the buying and selling of the currencies from all over the world by the brokers operating online.
The brokers allow investors to leverage such that the investors can transact 100 or 200 times more than their capital. The forex transactions take place across the globe online 24 hours a day. The currencies are traded in pairs. For instance Euro-US dollar pair, Euro-Canadian dollar pairs etc.
The forex market usually deals in buying and selling of the leading currencies of the world. The most popular currencies that are dealt in forex are, Euro(EUR), US dollar (USD), Canadian dollar (CND), Swiss Franc (CHD),Australian Dollar (AUD),British Pound (GBP), Japanese Yen (JPY) and the New Zealand dollar (NZD).The investor sells or buys these currencies in pairs as per the relevant forex rates.
For example the forex rate for EUR/USD is 1.31 for 5th Feb, 2012 i.e., if the investor spends 1032 he will get 1000 EUR in return? Now if these rates move to 1.58 in like one year the investor can sell his 1000 EUR and get 1058 dollars in return, thus yielding him $26. Thus the base currency here would be EUR i.e. the currency a buyer is interested to buy, while the counter currency would be USD. Now these fluctuations on huge sum of money yield tremendous returns on investment.
Since the forex trading does not involve brokerage, the purchase or bid of a currency pair is normally higher than the sale or the ask price of the same currency pair. This difference is termed as spread. The differential in the bid/ask is defined in points known as Pip and one Pip is normally equivalent to 0.0001 difference in the bid/ask rate.
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