There are 14 references cited in this article, which can be found at the bottom of the page. Forex” is a shorthand way of referring to the foreign currency exchange. It’s the market where currencies from different countries are traded. Investors trade in forex for the same reason that they trade in any other market: because they believe that the value of certain currencies will go up or down over time. Remember, currencies are commodities just like anything else. Know how currencies are traded in the forex market. Participants include everyone from the largest banks and financial institutions to individual investors.
Currencies are traded directly for other currencies in the market. In the forex market, prices are quoted in terms of other currencies. This is because there is no measure of value that is not another currency. However, the US Dollar is used as a base currency for determining the values of other currencies. Currency quotes are listed to four decimal places. Currency quotes are simple to understand once you know how.
For example, the Yen to US would be quoted as 0. You should understand this as “you need to spend 0. 0087 US Dollars to buy one Japanese Yen. Arbitrage, put simply, is the exploitation of price differences between markets. Traders can purchase a financial instrument in one market with the hope of selling it for more in another. Within the forex market, arbitrage is used to profit from differences in the quoted prices of currencies. In reality, arbitrage trades offer very little, if any, profit and price differences are corrected almost immediately.
Lightning-fast trading systems and large investments are used to overcome these obstacles. Trades in the forex are made in terms of lots. A standard lot is 100,000 units of a currency, a mini-lot in 10,000 units, and a micro-lot is 1,000 units. Traders, even very good ones, are often only left with a few points of arbitrage differences or trading gains. To counter these lows return percentages, the traders must make trades with large amounts of money.