Forex is the market for trading in foreign currencies, i.e., trading currencies by buying and selling for profit. The Forex trading market is the largest global market, with a trading volume equal to 5 trillion dollars per day.
When it comes to Forex trading, there are many questions that any ambitious traders seeking to enter the Forex market for the first time. This article is specially prepared for beginners so that together we can answer all the questions quickly and build a complete picture of what is Forex trading and how to be a professional trader.
What is the term Forex?
Forex is an abbreviated term for foreign exchange.
The Forex market is in which currencies are bought and sold. It is the largest market in terms of liquidity, as the daily trading volume in the global currency markets is more than 5 trillion US dollars. The market operates 24 hours, five days from Monday to Friday, except for international holidays.
How do Forex markets work
Unlike stocks or commodities, Forex trading is not happening in exchanges; instead, it is done directly between two parties in the (OTC) market. The Forex market is managed by a global network of banks spread over four major Forex trading centers in different time zones: London, New York, Sydney, and Tokyo. Since there is no central location, it is possible to trade Forex 24 hours a day.
There are three different types of Forex markets:
Spot Forex Market: It is the physical exchange of a currency pair, which occurs at the point specified for settlement of the trade – that is, immediately – or within a short time.
The forward Forex market: A contract is agreed to buy or sell a certain amount of the currency at a specified price to settle it on a specific date in the future or within a set of future dates.
The future Forex market: A contract is agreed to buy or sell a specified amount for a specific currency at a specified price and a particular date in the future. Futures contracts are legally binding
What is the base currency?
The base currency is the first currency in the Forex pair, while the second is called the quote currency. Forex trading always involves selling one currency to buy another, which is why it is listed in pairs – the price of the Forex pair is the value of one unit of the base currency in the quote currency.
Each currency in the pair is listed as a three-letter symbol, with the first two letters usually symbolizing the region, and the third being the currency itself. For example, GBP / USD is a currency pair that involves buying the British pound and selling the US dollar.
Major pairs. Seven currencies that make up 80% of Forex trading globally. These include: EUR / USD, USD / JPY, GBP / USD and USD / CHF.
Secondary pairs. Less traded, and in which major currencies are traded against each other instead of the US dollar. These include: EUR / GBP, EUR / CHF, and GBP / JPY
Non-major or unfamiliar pairs. A major currency against one from a small or emerging economy. These include: USD / PLN, GBP / MXN, EUR / CZK
Regional pairs. Pairs classified by region – such as Scandinavia or Australia. These include: EUR / NOK, AUD / NZD, and AUS / SGD
What moves the Forex markets?
The Forex market consists of currencies from all over the world, making it challenging to predict exchange rates due to the presence of many factors that may contribute to price movements. However, like most financial markets, Forex is primarily affected by the strength of supply and the power of demand. It is essential here to understand the influences that lead to price fluctuations.
Supply is controlled by central banks, who can announce measures that will significantly affect the rate of their currency. Quantitative easing, for example, involves injecting more money into the economy, and it may cause the price of its currency to depreciate.
Commercial banks and other investors tend to put their capital into economies with strong expectations. Therefore, if positive news occurs in the markets about a specific region, it will encourage investment and increase the demand for that region’s currency.
Unless there is a parallel increase in the supply of a currency, the mismatch between supply and demand will cause its price to rise. Likewise, negative news can cause investment to decrease and lower the currency’s price. For this reason, currencies tend to reflect a view of the health of the economy of the region they represent.
Also, market sentiment, which is often a reaction to the news, may play a significant role in increasing currency rates. If traders think the currency is heading in a specific direction, they will trade accordingly and may persuade others to follow the same, causing demand to either increase or decrease.
What is the spread in Forex trading?
The spread is the difference between the bid and asks price quoted for the Forex pair. Like many financial markets, when you open a Forex position, you will be presented with two prices. If you were to open a buy position, you would trade at the buy price, which is slightly higher than the market price. If you were to open a short position, you would be trading at the selling price below the market price.
What are lots in Forex?
Currencies are traded in lots – which are batches of currency used to standardize Forex trading. Because foreign currencies tend to move in small amounts, lots tend to be very large: a standard lot is 100,000 units. Therefore, the vast majority of Forex trades are leveraged because individual traders may not necessarily own 100,000 pounds (or whatever currency they trade) to place in each transaction.
What is the leverage in Forex?
Leverage is a way to gain exposure to large amounts of currency without paying the full trade value upfront. Alternatively, you can place a small deposit, known as margin. When you close a leveraged position, your profit or loss will depend on the overall volume of the trade.
Although this may inflate your profits, it may also bring risks of amplifying losses – including losses that exceed your margin. Therefore, leveraged trading very importantly requires knowing how to manage your risk.
What is the margin in Forex?
Margin is a significant part of trading with leverage. It is the term used to describe the initial deposit you place to open and maintain a leveraged position. When trading Forex on margin, remember that your margin requirements will change depending on your broker and the size of your trade.
Margin is often expressed as a percentage of the full position. So, trading EUR / GBP, for example, may require paying only 2% of the total value of a position for it to be open. So instead of depositing £ 100,000, you only need to deposit £ 200.
What is a Pip in Forex?
Pips are the units used to measure the movement in a Forex pair. The Forex pip usually represents a single number move in the fourth decimal place of a currency pair. If the GBP / USD pair moved from $ 1.35361 to $ 1.35371, it might have driven by one pip. Other decimal places that appear in the price after a pip are known as fractional pips or pipettes.
The exception to this rule is when the quote currency is listed in much smaller denominations, the most notable example being the Japanese yen. The move in the second decimal place for this coin constitutes one pip. Thus, if the EUR / JPY pair moved from 106.452 to 106.462, it moved again by one pip.