What is Forex?

If I told you there was a highly liquid market much larger than the New York Stock Exchange, where you have the potential to double your money in hours -- with limited risk -- your initial reaction might be utter disbelief, or at least a large dose of skepticism. Doubt no more, because it's true. Forex trading and Forex has exploded full force onto the trading scene, and it offers traders some unique characteristics not found elsewhere. Don't pre-judge this market; ignore it at your own risk. Many traders have expanded their trading to include Forex in addition to stocks and/or futures, and many of you have asked us for information and how to get involved. So here it is -- a quick overview of the Forex market.What Is Forex and Forex trading?Forex is an acronym for "foreign exchange," and involves trading pairs of currencies, i.e., buying one currency and selling the other in a single transaction. For example, USD/JPY is buy US dollar/sell Japanese yen. In this case, you expect the dollar to appreciate versus the yen, the yen to depreciate against the dollar, or both. The latter situation, of course, is ideal.What Currencies Are Traded?The foreign exchange market is gigantic: over $1.5 trillion in daily Forex trades, with national banks such as the Bank of Japan, money center banks such as Citicorp and large pension plans and hedge funds being the major players. It's mainly the larger currencies that are involved, together with the US dollar.While there are several currency pairs that offer good opportunities, these four are the most widely traded: Euro/US dollar (EUR/USD), US dollar/Swiss franc (USD/CHF), US Dollar/Japanese yen (USD/JPY), British pound/US dollar (GBP/USD).How Do You Calculate Price Movement?Price movement for any foreign currency pair is calculated in "PIPs” (Price Interest Points) which are 1/10 of 1% of the contract size. For example, for a large account, a PIP is $10. For a mini account, one PIP will be $1.00. For example, on a mini account, let's take a quote of 1.2386 EUR/USD. If price moves to 1.2387, that's one PIP, or $1.00. 100 PIPs equals 1 basis point, or "BIP," so a move from 1.2386 to 1.2486 = one BIP, or $100. Not bad for $50 initial margin.You Risk Is Limited -- Here's HowUnlike stocks or futures, stops on Forex are guaranteed to be filled, even on gaps, and your account cannot go below your initial margin deposit. You can never lose more than you put down, and you will never receive a maintenance call. To show how this works, let's look at the following trade-gone-wrong: A short in the Swiss Franc at 1.2676 with a stop loss at 1.2710, risking a total of 35 pips. Then the unthinkable happens: a big gaping hole in the chart appears over the weekend. If something like this happened in the equity markets, your stop is meaningless and you would cover at the opening price Monday morning, locking in a huge loss. With FX, your stop is honored, yielding a more manageable 35-pip loss. Note that a stop must be in place to receive this protection!