What is Foreign Exchange?
Foreign exchange, more commonly known as Forex or FX, relates to buying and selling currencies with the goal of making a profit off 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. This market attracts many traders, both beginners and more experienced.
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With approximately $6 trillion traded in the market every day, the forex market has the highest liquidity in the world. This means that one can buy almost any currency he wishes in high volumes any time the market is open. The forex market is open 24 hours, five days a week – Monday to Friday. Trading begins with the opening of the market in Australia, followed by Asia, and then Europe, followed by the US market until the markets close on the weekend. The only market open on the weekend is the cryptocurrency market.
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 in other markets, in the forex market you can always find buyers and sellers.
Currency Pairs
There are hundreds of currencies in the world, and each one has its own three-letter symbol. For instance, the American Dollar is represented by USD, Euros are EUR, Swiss Francs are CHF, and British Pounds are GBP.
Currencies are divided into two main categories – Major currencies and Minors. The major currencies are derived from the most powerful economies around the globe – the US, Japan, the UK, the Eurozone, Canada, Australia, Switzerland and New Zealand. When you pit them against a counterpart. they become a currency pair. For instance, the GBP against the USD becomes GBP/USD where one’s value is relative to the other. If the GBP goes up against the USD, then the USD goes down.
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, GBPJPY and others. The exotic pairs have one major currency and one minor, such as EURTRY, USDNOK and many more.
Leverage Trading
Leverage is a facility given by the broker to enable traders to hold trading positions that are larger than what their own capital would otherwise allow. It is important to remember that the profits and losses are determined by the position size, and as leveraged trading can magnify profits also losses can be enhanced. Thus, proper risk management techniques have to be used.
What affects the Forex Market?
The forex market has high liquidity, due to an elevated supply and demand rate. Traders apply transactions based on financial events, as well as general events. Naturally, when a currency will be on a high demand, its value will raise comparing to the other currencies, and vice versa.
Financial events are statements or data releases made by countries, central banks or other financial institutions, on topics such as the unemployment rate, manufacturing numbers, consumer spending and many more. Prior to these figures being releases, investors release their anticipated figures. If the release exceeds expectation, this can push up the price of the relevant assets. However, if the release falls below expectation than this can push down the price of the asset lined to the data. For instance a decrease in a country’s unemployment rate can indicate that the economy is strong, and this can lead to an increase of the local currency.
If it’s a major one it will affect other currencies as well. Before the event takes place traders speculate on its content, and based on these speculations open positions. All the events can be seen and followed on the economic calendar.
Example
Going back to the popular trading pair – the EURUSD. Once logged into the platform the trader will check the ask and bid prices; for the purpose of the example they will be 1.2356 (ask), and 1.2359 (bid). The difference, as noted, is 3 pips and this will go to the broker.
If the trader believes that the Euro will go up, he will enter a ‘BUY’ command. Then he will be required to select an amount – say 10,000 units. The price for that is $12,356, and using leverage it comes to $30.89. If the market responds the way the trader predicted and the Euro rose from 1.2356 to 1.2360 – 4 pips, the trader would have made a profit from this trade.