Forex is the abbreviation for foreign exchange. It is the relative value of one currency vs. another currency. It is converting the domestic currency into a foreign currency based on the exchange rates.
Forex trading is the activity where you can bet if one currency will get stronger or weaker relative to another currency. For example right at this moment if we can buy 1 Euro we can buy 1.39 US Dollars, this exchange rate can change at any time. It is the banks which keep adjusting this value according to the supply and demand.
Let’s take for example we bet on the foreign currency exchange between USD and EUR. Here we are going to bet that the EUR will become stronger than the USD. In this case, we buy a euro/USD Pair. When we believe that one currency will rise above the other currency, then we must buy the stronger currency and sell the weak currency since the sale of the coin will be handled by an outside brokerage firm all we have to do is to buy the stronger Currency. Another term for buying the stronger currency is going long on the pair. If we go long of the EUR/USD pain, then we mean to say that we believe that the Euro currency is likely to be stronger than the US dollar currency.
When we feel that the currency is weaker and we want to sell that currency, we use the term short the weaker currency. Say for example you are selling the US dollars; you can say that you are in a nutshell of the US dollars pair.
One pip represents one one-hundredth percent or o.ooo1 which is the smallest amount of currency fluctuation used by a forex. It is the unit used to express the price change of a foreign exchange rate.
The brokerage firms help us in making profits without making us depositing our full money in the bet. To understand how leverage works, let’s assume that you believe that Euro will become much stronger against the dollar in an EUR/USD pair. You are so sure that you can even bet a huge sum of money on it, but you cannot afford it. The brokerage firms will take this risk and lend you the amount of money to bet. All they need from you is one thousand Euros as a collateral deposit. From these brokerage firms, you can get money for up to four hundred times the amount you deposit.
If you place a bet with 50 thousand Euros and you have a thousand Euros as leverage, then the leverage ratio is said to be 50:1. Here we should not get the idea that the brokerage firm lends you the money for free, they charge interest rates based on the current interest rates.
A one thousand Euro bet is a micro LOT, a ten thousand Euro bet is what we call a mini LOT, a one hundred thousand chance is what we call as a standard lot.