The foreign exchange market (Foreign exchange market or currency market), also called Forex – the place where the exchange of currencies of different countries takes place – their purchase and sale.
Almost all of us were faced with the need to exchange one currency for another: the US dollar for the euro, the British pound for the Canadian dollar, the ruble for the Japanese yen, etc. However, in addition to the need to change money due to the fact that we are going somewhere (for example, on a trip or to an international conference in a country that has a different currency), currency exchange can be used to speculate on price changes. That is, to profit from the sale or purchase of currencies.
We often talk about the Forex market as an investment on the Internet, because Forex traders use different currency pairs and strategies to make money in online trading. For example, automated trading systems that do all the work for the trader. In this article we will look at what the Forex currency market is and how to trade in the foreign exchange market and conduct exchange transactions as part of online trading.
What is the Forex currency market for traders
The foreign exchange market is the financial market in which currency pairs are traded. Forex is a foreign exchange market uniting traders who want to exchange one currency for another in accordance with their needs. In the foreign exchange market, currencies are traded at market prices – ASK and BID (purchase price and sale price) – and over-the-counter quotes.
Currency pairs are quoted in relation to each other – that is, one currency is converted into another. For example, the exchange rate of euro to US dollar 1.1250 means that to buy 1 euro you need to pay 1.1250 dollars. The exchange rate always shows how many units of the second currency must be paid in order to buy a unit of the first currency.
– GBPUSD rate of 1.24652 means that to buy 1 British pound, you need to pay 1.24652 US dollars;
– USDCAD rate of 1.35735 means that for the purchase of 1 US dollar you need to pay 1.35735 Canadian dollars.
Currency market advantages
To speculate on the foreign exchange market, it is better to first understand what its features are and what characteristics it has.
The Forex currency market is the largest market in the world with the highest liquidity. Trading in the foreign exchange market takes place in real time with various currencies existing in the world. Exchange rates are constantly changing, which causes interest from investors. The foreign exchange market is a global market that is traded 24 hours a day, 5 days a week.
The Forex currency market is a global market open 24 hours a day from Sunday evening to Friday evening. Therefore, you can trade at any time. Forex is an over-the-counter market, and there is no central bank to regulate all trading positions. To become part of this market and invest in exchange rates, all you need is a trading account with an online broker and a stable Internet connection.
Forex liquidity and forex trading basics
In the international economy, millions of currency transactions occur every day. When, for example, a European importer buys raw materials, the cost of which is indicated in dollars, he must convert his funds into dollars to pay.
Central banks most often regulate the exchange rates of their currencies: for example, the Bank of Japan traditionally closely monitors the exchange rate of the Japanese yen and, if necessary, intervenes in prices in the foreign exchange market.
There are a lot of players in the foreign exchange market, and this gives significant volumes of transactions. If you are looking for a market for speculation on the exchange rate, Forex is a great solution for your investment strategy for trading in the foreign exchange market and a good tool for making profits.
The functioning of the foreign exchange market allows you to trade, given the large number of exchange rates.
The 8 most liquid and most traded world currencies:
- US Dollar (USD)
- Euro (EUR)
- British Pound (GBP)
- Japanese Yen (JPY)
- Swiss franc (CHF)
- Australian Dollar (AUD)
- Canadian dollar (CAD)
- New Zealand Dollar (NZD)
How the foreign exchange market works – volatility
During the day, the value of one currency in relation to another can vary significantly, depending on supply and demand, under the influence of economic, social or political factors. This is called “volatility.” In general, the exchange rate reflects the economic conditions of both countries. And it is precisely the fluctuations in exchange rates in the market that represent the potential profit of a currency trader.
The stronger the fluctuation of the currency pair quotes, the more interesting it is to use strategies such as scalping, high-frequency trading and other short-term trading strategies of the currency market. The interbank foreign exchange market is one of the most volatile markets in the world.
But volatility requires attention, especially if you trade on the Forex market with leverage: your potential profit may be higher, as well as possible losses.
Forex trading and leverage
The foreign exchange market is the market with the highest leverage. Leverage can bring you both profit and loss. For example, a leverage of 1: 300 means that when investing 1 euro, the Forex broker adds 300 euros, and you can invest in a position 300 times your initial capital.
That is, even with relatively small capital, you can open quite large trading positions. The greater the leverage, the greater the position you can open, with the same initial capital.
Imagine that you just managed to close a position at the euro-dollar rate of 1 lot. You have earned 50 pips. Your account in US dollars. What is the profit? The calculation is very simple: 10 dollars (the value of a point under the EURUSD contract) * 50 pips earned = 500 US dollars. This is your profit.
Most online brokers do not charge for Forex trading if the client pays for the spreads. On accounts with a low spread – ECN, Raw Spread and the like – traders pay not only interbank spreads, but also the fees of an online broker who also wants to earn on your operations in the foreign exchange market. Commissions depend on the type of trading account you choose.
Forex contracts have a standard size: 100,000 units – 1 lot. The currency of the contract is the first currency of the pair. For example:
1 lot EURUSD = 100,000 euros
1 lot GBPUSD = 100,000 pounds
1 lot USDJPY = 100,000 US dollars
1 lot AUDCAD = 100,000 Australian dollars
Forex Trading – Spread
Spread – the difference between the purchase price and the sale price of the currency.
That is, the value of the spread = Ask-Bid.
Buy deals open at Ask price, and sell deals open at Bid price.
Buy trades are closed at Bid price, and sell trades are closed at Ask price.
It is for this reason that the profit of Forex positions is initially negative when opening a position at the current rate.
Trading in the foreign exchange market for beginners – an example of investing
To make money in the market from fluctuations in exchange rates, you must take a position in the direction of movement of the asset. You can trade almost any currency in the world, but most likely, as a beginner, you will look at the main currency pairs. Currencies are traded in pairs, and you always buy or sell the first currency of a pair. For example:
– “long” position on the Euro-Dollar (Buy). If you think that the euro will grow against the dollar, you can buy EUR / USD. The euro against the dollar should increase in order for your position to be profitable.
– “short” position on the Euro-Dollar (Sell). If you think that the euro will depreciate against the dollar, you can open a sell position at EUR / USD. The euro against the dollar should go down so that your position is profitable.
Of course, it is very difficult for beginners to conduct a correct analysis of the current market situation, so we recommend using Forex trading robots that will take on all the necessary trading operations, or Forex indicators that will accurately indicate the possible direction of price and time to enter the market.
Also good helpers in trading can be analytical reviews and Forex forecasts, focusing on which you can successfully trade in the foreign exchange market.