 |
| What is Forex? Basics of Currency Trading. |
Forex Market Currency Trading.
In this tutorial, we will shed light on a term that we often hear, especially on the internet, which is the term "Forex market" or "FOREX" or the global currency market.
What is Forex or the Foreign Exchange Market?
Forex or FOREX is an abbreviation for the term Foreign Exchange Market, which refers to the foreign currency exchange market. It is also symbolized by the abbreviation FX. Forex is one of the most well-known financial markets, where the currencies of countries are traded between millions of investors, banks, and investment funds for various purposes, including benefiting from currency exchange rate fluctuations and achieving profits through buying and selling operations.
The Forex trade has flourished due to technological advancements, the spread of the internet, and modern means of communication. The Forex market is a decentralized market with no geographical boundaries, where trading takes place through the OTC (over-the-counter) system.
How did the Forex market begin?
Forex began based on the principle of barter, where humans used to engage in trade by exchanging goods with each other due to the absence of money or banknotes at that time. The barter system was the cornerstone on which the currency trading system relied. People then used what they considered valuable in trade operations, such as shells, gemstones, and others, to determine the value of a commodity based on a specific number of these mediums. For example, buying meat in exchange for four shells.
Soon, those mediums were replaced by pieces of gold, silver, and precious metals. After that, people turned to using paper currency as an alternative to gold and silver, where banknotes were printed to represent a certain amount of gold. This marked the beginning of the emergence of the money we know today.
What is the trading volume in the Forex market?
The Forex market is the largest financial market in the world in terms of liquidity and trading volume, reaching $7.5 trillion daily in April 2022. The Forex market cannot be compared to any other financial market in terms of liquidity. For example, the New York Stock Exchange (NYSE), which is the largest stock market in the world, has a daily trading volume of no more than $70 billion.
Who trades in Forex?
The massive liquidity in the currency market is attributed to the presence of various categories of traders, such as major investment banks, central banks, investment funds, asset management companies, brokerage firms, individual traders, and traders for non-financial purposes like hedging. Additionally, the evolution of communication and online trading platforms, as well as the use of financial facilities or leverage in Forex trading, attract more and more investors to the currency market every day.
Advantages and disadvantages of Forex trading:
Key advantages of Forex:
- Massive liquidity and high trading volume in Forex.
- Forex trading is open 24 hours a day, 5 days a week.
- Forex trading is decentralized and takes place over-the-counter (OTC).
- Easy monitoring of the Forex market and access to currency news.
- Potential for profit during both rising and falling currency values.
- Possibility to trade with small amounts due to leverage.
- Ease of opening a real account in Forex.
Disadvantages of Forex:
- High volatility and price fluctuations.
- High level of risk.
- Weak supervision or regulation.
When can Forex be traded? Forex market hours and trading sessions.
The Forex market is a decentralized market that operates through various communication channels worldwide, without a specific geographical location as a trading center. The market operates 24 hours a day, five days a week, starting from the opening of trading on Monday until the close of trading on Friday. The market is closed on Saturdays and Sundays, which are considered global weekend holidays. Forex trading goes through four major trading sessions: the American, European, Asian, and Australian sessions. As a result, trading continues throughout the day as these sessions overlap with each other and extend into the next day.
What currencies are present in the Forex market, and what do currency pairs mean?
The currencies traded in the Forex market are the currencies of different countries, with a focus on major economies. The most commonly traded currencies include:
- United States Dollar (USD) - the currency of the United States.
- Euro (EUR) - the currency of the European Union countries.
- British Pound (GBP) - the currency of the United Kingdom.
- Japanese Yen (JPY) - the currency of Japan.
- Australian Dollar (AUD) - the currency of Australia.
- New Zealand Dollar (NZD) - the currency of New Zealand.
- Canadian Dollar (CAD) - the currency of Canada.
- Swiss Franc (CHF) - the currency of Switzerland.
Trading with currency pairs in the Forex market:
Forex trading is conducted using currency pairs, where two currencies are paired together for trading. This involves buying one currency while selling another currency simultaneously. Each currency pair consists of a base currency and a quote currency. For each currency pair, there is an exchange rate that represents the amount of the base currency required to obtain one unit of the quote currency.
For example, to obtain one Euro, you would need to pay 1.17189 US Dollars. This means that one Euro is equivalent to one US Dollar and 17 cents.
What are the basics of Forex that you need to know before starting Forex trading?
There are several fundamental concepts you should know before trading Forex:
- Tradable currency pairs in Forex.
- Spread - the difference between the buying and selling prices.
- Pip - a unit of measurement for price movement, and how profits and losses are calculated in Forex.
- Buying and selling process, lot size, and contract size in Forex.
- Leverage and margin in Forex trading.
- Margin Call - a notification when account equity falls below the required margin level.
How do you start trading currencies?
Currency trading is a vast market accessible to everyone. To start trading currencies, you can open an investment account with a Forex broker or brokerage firm. Brokers provide individuals with facilities such as leverage, allowing them to trade larger amounts compared to their deposited capital. To begin trading Forex, you need to:
- Learn the basics of Forex trading and important Forex terminology.
- Learn how to use a Forex trading platform.
- Learn to analyze Forex and currency price movements.
- Understand capital management in Forex.
- Develop a trading plan for Forex.
- Practice trading with a demo account before risking real money.
- Choose a reputable Forex broker and open a live account.
Is currency trading profitable? And what are the risks of currency trading?
Currency trading is known for its flexibility in risk management compared to stock trading. Traders in the currency market can achieve very high returns when they decide to take on more risk.
Currency trading is often conducted using leverage and margin systems, which amplify the trading volume compared to the actual capital. This amplification is what makes investing in the currency market risky. Therefore, it is important to learn currency trading well before starting and only trade with disposable funds.
Frequently Asked Questions:
What is Forex?
Forex, also known as FOREX, is the foreign exchange market and is one of the most popular and largest financial markets in terms of liquidity. Forex trading involves the exchange of currencies and taking advantage of price differences between buying and selling.
Who trades in Forex?
Various entities trade in Forex, including major investment banks, central banks, financial and investment institutions, wealth management companies, private companies, and individuals.
How can I trade Forex?
Individuals can trade Forex through licensed brokerage firms. The trader opens a trading account with the brokerage firm, and the broker provides facilities or leverage that enable trading in the market with a multiple of the deposited capital.
What is the best Forex broker?
There are several criteria and considerations for choosing the best Forex broker. Some of these include the broker being licensed by a reputable regulatory authority, the company's management having experience in the market, competitive prices, and commissions, among other factors. This article explains in detail how to choose a suitable Forex broker.
