What is Foreign Exchange
Foreign exchange, more commonly known as Forex or FX, relates to buying and selling currencies with the purpose of making profit of the changes in their value. As the biggest market in the world by far, larger than the stock market or any other, there is high liquidity in the forex market. Therefore, the forex market attracts many traders, beginners and experienced alike.
The Forex Market
With approximately $4 trillion USD traded in the market every day, the forex market has the highest liquidity in the world. Basically,
this means that one can buy almost any currency he wishes in high volumes while the market is open. The forex market is open 24 hours,
5 days a week – Monday to Friday. Trading begins with the opening of the market in Australia, Asia, Europe to follow and then the USA until the markets close.
The forex market start time during the summer is on Sunday at 9:00pm GMT, and ends at 9:00pm GMT on Friday. In the winter it’s 10:00pm-10:00pm accordingly. That results with currencies being traded at all times, day or night. Unlike some other instruments, where a downfall of the market would leave traders with untradeable assets, the forex market can always find a buyer or a seller.
Advantages of Forex Trading
- 90+ currency pairs - majors, crosses and exotics
- Crypto Currency
- Leverage up to 1:500
- Trade the most liquid market in the world
- Trade with NO hidden charges
A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type; commodities are often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange,commodities must also meet specified minimum standards, also known as a basis grade.
- Less Brokerage charge
- Instant exposure to global economies
- Trading without actually owning the financial instrument on which the contract is based Speculation on future uptrend/downtrend market price movements
- Ideal for beginner traders due to low deposits
- Ability to go short and profit from falling prices
- No stock exchange fees
There are hundreds of currencies in the world, and each has a three letter symbol. American Dollars are USD, Euros are EUR, Swiss Francs are CHF, British Pounds are GBP and onwards to all the currencies.
Currencies are divided into two main sorts – Major currencies and minor ones. The major currencies are derived from the most powerful economies around the globe – the US, Japan, the UK, the Euro Zone, Canada, Australia, Switzerland and New Zealand. Together with the other currencies they create forex pairs.
When going to a store to buy groceries, we need to exchange one valuable asset for another – money for milk, for example. The same goes for trading forex – we buy or sell one currency for the other. The currencies in the pairs are referred to as one against another.
There are three types of forex pairs; Major pairs, Minor pairs and Exotic pairs. The major pairs always involve the USD, and are the most traded ones. The seven major pairs are EURUSD, USDJPY, GBPUSD, USDCAD, USDCHF, AUDUSD and NZDUSD. In the minor pairs the major currencies are traded between each other, excluding the USD. These can be EURGBP, CHFJPY and others. The exotic pairs have one major currency and one minor, such as EURTRY, USDNOK and many more.
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Forex Trading Basic Terms
The most popular pair traded is the Euro vs. the American Dollar, or EURUSD. The currency on the left is called the base currency,
and is the one we wish to buy or sell; the one on the right is the secondary currency, and is the one we use to make the transaction.
Each pair has two prices – the price for selling the base currency (ask) and a price for buying it (bid). The difference between them is called a spread,
and represents the amount brokers charge to open the position. The more a currency is traded, i.e. high volatility, its spreads will be narrower.
The rarer the pair is, the wider the spreads will be.
Usually a quote will be presented with four numbers after the dot, for instance 1.2356. In the case of EURUSD it means for every Euro the trader wishes to buy he will have to invest 1.2356 US dollars. Any change in the currency value will usually be seen on the fourth figure after the dot, mainly known as a pip. The spreads, gains and losses will usually be presented in pips.
Some other terms of the online forex trading world are Going long and Going short, which stand respectively for ‘buying’ and ‘selling’. A trader who speculates the market will rise is called a ‘Bullish Trader’, while on the other side stands the ‘Bearish Trader’, who is more on the defensive side. In accordance, the terms ‘Bull Market’ and ‘Bear Market’ are used to describe the way the market goes.
A bull market is on the rise, and a bear market is usually decreasing. Experienced traders will decide their strategy depending on the market trends, and will make sure to follow all relevant events so they can precede the changes in the market and gain profit.
In the past, every trader called his broker and instructed him on actions to be made. Today the trades are done directly by the client on a software, called a trading platform. Many of the platforms are available for computer, internet and mobile. Every trader has his own strategy, and he should find the platform that will enable him to perform it in the best way possible, i.e. that he will feel most comfortable in.
Leveraged trading, or trading on the margin, allows the trader to open larger positions than his own fortune would otherwise allow him. In most forex pairs,
the maximum leverage that can be employed is 400:1; meaning that for every $400 of worth in the position, the trader will need to invest $1 out of his account.
Therefore, if he wishes to buy 10,000 unites of EURUSD in the price of 1.2356, instead of paying $12,356 he will pay only $30.89, which is 0.25% of the price, or a 400:1 ratio. It is important to remember that the profits and losses are determined by the position size, and as leverage trading can magnify profits also losses can be enhanced.