?what is forex trading
Forex trading is the act of speculating on the movement of exchange prices by buying one currency while simultaneously selling another¹. Forex is short for foreign exchange, and it is the largest and most liquid market in the world, with an average daily turnover of over $7.5 trillion.
Forex trading is done electronically over the counter (OTC), which means that there is no central marketplace or exchange for currency transactions. Instead, traders use computer networks and online platforms to buy and sell currencies at any time, across different time zones.
Forex trading involves trading currency pairs, such as EUR/USD (the euro versus the U.S. dollar) or USD/CAD (the U.S. dollar versus the Canadian dollar). Each currency pair has an exchange rate, which is the price of one currency in terms of another. For example, if the EUR/USD exchange rate is 1.18, it means that one euro can buy 1.18 U.S. dollars.
Forex traders can profit from the fluctuations in exchange rates by predicting whether a currency will appreciate or depreciate against another. For example, if a trader expects the euro to rise against the U.S. dollar, they can buy euros and sell U.S. dollars (or go long on EUR/USD). Conversely, if they expect the euro to fall against the U.S. dollar, they can sell euros and buy U.S. dollars (or go short on EUR/USD).
Forex trading can be used for various purposes, such as hedging against currency risk, speculating on geopolitical events, diversifying portfolios, or accessing global markets. Forex trading can also be leveraged, which means that traders can control large positions with a small amount of capital. However, leverage also increases the potential for losses as well as gains.
Forex trading is not suitable for everyone, as it involves high risk and volatility. Forex traders need to have a good understanding of the factors that affect currency movements, such as economic data, interest rates, political events, and market sentiment. Forex traders also need to have a sound trading strategy and discipline, as well as a reliable trading platform and broker.
What is the difference between a pip and a point in forex trading?
A pip and a point are both terms used to measure the smallest price change in forex trading, but they are not exactly the same. A pip is short for percentage in point, and it is the fourth decimal place in most currency pairs, such as 0.0001. A point is the fifth decimal place in some currency pairs, such as 0.00001. For example, if the EUR/USD exchange rate changes from 1.1800 to 1.1805, it has moved 5 pips or 50 points.
Pips are more widely used and recognized than points in forex trading, as they are more relevant for calculating the profit or loss of a trade. Points are more significant in other financial markets, such as stocks or bonds, where they represent the left side of the decimal point. For example, if a stock price changes from $100 to $101, it has moved one point or 100 cents.
To summarize, pips and points are both ways of expressing the smallest price movement in forex trading, but they differ in their decimal places and significance. Pips are more common and important than points for forex traders.