Currencies are quoted in pairs. The first listed currency is known as the base currency and the second is called the counter or quote currency.

Currencies are quoted using five significant numbers, with the last place holder called a point or a pip.

For example a EUR/USD quote: 1.2760/1.1765

Like all financial products, forex quotes include a "bid" and "ask" or a "sell" and a "buy" price. By quoting both the bid and ask in real time, brokers ensure that traders always receive a fair price on all transactions. As in any traded instrument, there is an immediate cost in establishing a position. This cost will vary between the different brokers and is called "spread".

For example, USD/JPY may bid at 131.40 and ask at 131.45, this five-pip spread defines the trader's cost, which can be recovered with a favourable currency move in the market.

The margin is a performance bond, or good faith deposit, to ensure against the total loss of your account. Trade stations have margin management capabilities. In the event that funds in the account fall below margin requeriments, the broker's dealing desk will close all open positions. This prevents clients accounts from falling into negative balance, even in a highly volatile, fast moving market.

The new NFA rule requires a minimum 1% margin at all time to maintain an open trade (note this may change from time to time so although we use 1% as the example at some stage in the future the margin may be different. However using similar caculations one can easily calculate the new margins). Some deal stations automatically calculate thi according to the formula and hence the margin requirements are continually varying.

Example:

EUR/USD

Rate: 1.2326/1.2331

Account type: 100.000/lot account

1% leverage: 100.000x0.07 (1%)=1000 units

When you are long (buy) EUR/USD, the margin required is:

1.2331 (EUR/USD) x 1000 (units of a base currency EUR) = USD1233 for each lot.

Some brokers require $1.300 per lot in margin for EUR based pairs. In general, a margin of $1.300 allows you to control a $100.000 spot currency position. This is an efficient use of trading capital as the leverage in futures and stock markets is much less.

The forex market is a seamless 24 hour market and is open 5 days a week. At 5 pm Sunday, New York time, trading begins as markets open in Sydney and Sigapore. At 7 pm the Tokyo market opens, followed by London at 2 am, and finally New York at 8 am. (time is based on New York time).

As a trader, this allows you to react to favourable/unfavourable news by trading immediately.

The trading of forex takes place all over the world and is not located in any one central location. Deals are done between a variety of traders, from banks to managed funds to individual traders.

Forex trades approximately $2 trillion a day and is by far the most liquid market in the world. It takes the NY Stock Exchange 3 months to trade the same USD value as the forex trades each and every day making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of any other market. If you compare this to the USD30 billion per day futures market, it becomes clear that the futures markets provide only limited liquidity. The forex market is always liquid, meaning positions can be liquidated and stop orders executed without slippage.