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The word forex is short for foreign exchange. Before 1944, all the world currencies were pegged to Gold. In other words, the currency could be exchanged for gold directly. In 1944, through the Bretton Woods agreement, the US dollar became the world’s reserve currency.
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The forex exchange market currently has a revenue of more than $5 trillion per day. This is one the most matured and actively traded markets in the world with participants such as retail traders, brokers, investment banks, large corporations, and market makers. In forex market, the value of a currency is determined relative to another.

A quote is the price the market participants are willing to offer for a particular currency pair. Let us take an example to understand the quote of a currency pair. For example if you take the GBP/USD pair. Here, GBP is called the base currency, while USD is called the quote currency. Let us take another example of USD/INR and the current quote for is 65.45/65.50. Then this means that if you want to sell one dollar in exchange of indian rupee, then you will find buyers at the price of 65.45 INR which is the bid. Similarly, the ask price for one dollar in exchange of indian rupees is 65.50 INR. Therefore, the quote is a representation of Bid/Ask. Sometimes the quote can consist of a single price. In that case, it would represent the last traded price for that currency pair.

The Spread in a forex market refers to the difference between the BID price and the ASK price of a quote. Usually a highly liquid market with many participants have tighter or smaller spreads. Conversely, the illiquid markets have a wider or bigger spreads. This happens because the competition amongst the traders is less in an illiquid market. If the USD/EUR pair is quoted as 0.8625/0.8630 then the spread will be: 08630-0.8625 =0.00005 Euros.

Most major currencies, except the Japanese yen are traditionally priced to four decimal places, and a pip is defined as the one unit of the fourth decimal point. For dollar based currencies this is to 1/100th of a cent. For the yen, a pip is one unit of the second decimal point, because the yen is much closer in value to one hundredth of other major currencies. Since the beginning of electronic trading, exchanges and brokers have been providing quotes that are less than pip values. For example, if the USD/INR is quoted at 65.45213 and after 5 minutes the quote moves to 65.46111 then movement in terms of the pips will be (65.46111- 65.45213) divided by 0.0001, which equals 89.8.

In forex trading, traders use leverage to trade a currency pair. The leverage that is achievable in the forex market is one of the highest that traders can obtain. Let example, if you want to trade $100,000 worth currency, with a margin of 1% or sometimes written as 1:100, then you will have to deposit only $1,000 into your account. Leverage of this magnitude is significantly larger than the 2:1 leverage commonly provided on equities and the 15:1 leverage provided in the futures market.

Quantra is an online education portal that specializes in Algorithmic and Quantitative trading. Quantra offers various bite-sized, self-paced and interactive courses that are perfect for busy professionals, seeking implementable knowledge in this domain.

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