Currency trading, or Forex for short , is the largest financial market in the world. Hundreds of trades are made every second, and the daily turnover from Forex trading reaches over 5 trillion US dollars. Most of this turnover is the result of speculation. Speculation is what you do through forex trading – you try to profit from fluctuations in the price of currencies.
What is Forex?
Forex literally means ” currency exchange “. When one currency is exchanged for another, it is called a currency transaction. We participate in the Forex market in all ways. When we change currency, when we shop online from another country, even when we buy foreign goods from stores. Governments, banks, funds, international corporations and companies, investors and traders – they are all participants in a world called Forex.
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The main characteristics of the Forex market are:
5 days a week
Opportunity to take advantage of both rising and falling markets
Borrowed capital trade (leverage)
Trading without commissions
Forex is a great way to trade for people who have limited time. Other financial markets have working hours and are thus limited to trading in a certain period of time for the day, while here you can make deals around the clock. The market closes only on weekends, when most banks in the world are closed.
Leverage, or leverage, is probably the feature that excites individual traders the most. When you invest, you can earn using only your own funds, but you would achieve much more by taking advantage of the leverage, borrowing money from your broker. It should be noted that higher amounts lead to a higher risk of losing money.
You can increase the investment power of your trading account by using only part of your own funds to make a deal and borrow the rest from your broker. For example, the Forex market allows you to manage a total of $ 100,000 with only $ 1,000 of your own funds. This means that you have to pay only 1% of the value of the position with your funds, and the remaining 99% of the value of the transaction can be borrowed from your investment intermediary (broker).
Learn more about leverage (margin) from the article What is leverage? .
Where is the Forex market?
The US stock market is located on Wall Street. The London Stock Exchange is located at 10 Paternoster Square. Where is Forex located? The answer is nowhere! There is no central location. Trading takes place 24 hours a day through electronic communications networks (ECNs) in various markets around the world. It does not need a physical location because it is traded through this system.
You may have heard that London is the global center of the foreign exchange market. This is because London accounts for almost 35% of all trade. That’s double 17% of New York! Although the Forex market has no place, London is considered a global center.
When trading on the dynamic Forex market you will notice two Forex quotes (prices) – Bid and Ask.
Bid is the price at which you can buy a currency pair
Ask is the price at which you can sell it
These quotes are based on the current exchange rate or what part of the second currency you would receive in exchange for a unit of the first currency. For example, if 1 EUR can be exchanged for 1.20 USD, Bid and Ask prices will be located on both sides of this level.
If you buy currency in one trade, this is known as a long position and you hope that the currency pair will grow so that you can sell it at a higher price and profit from the difference.
When selling, the opposite is true. Then you have a short position and hope that the value of a given currency pair will decrease so that you can buy back at a lower price and make a profit from the difference.
Ако начинът, по който трейдърите реализират печалба, е чрез осребряване на разликата между цените на на валутните двойки, следващият логичен въпрос е колко може да очаквате дадена валута да се движи?
Pip is a gradual movement of the price, with a certain value depending on the market in question. Simply put, the pip is the standard unit for measuring how much the exchange rate has changed.
Initially, the pip was actually the smallest increase by which the price of a currency could move. But with the advent of more accurate pricing methods, this original definition is no longer as accurate. In most cases, pip is the fourth digit after the decimal point, but in others, as in pairs involving the Japanese yen, it is the second.
The pip is 0.0001, so if EUR / USD moves from 1.1266 to 1.1267, this will be a change from 1 pip. Major currency pairs are the most liquid and therefore provide the most opportunities for short-term trading.
In the Forex market, the spread is the difference between Bid and Ask prices. For example, if the Bid price of EUR / USD is 1.12668 and the Ask price is 1.12669, the spread will be 0.0001, or 1 pip.
In any Forex transaction, the value of the currency pair must cross the spread before it becomes profitable. To continue with the previous example, if a trader enters a long EUR / USD position at 1.12668, the trade will not become profitable until the value of the pair is higher than 1.12669.
In a currency pair with a wider spread, such as EURCZK, the currency will have to make more movement to make trading profitable. For example, the Bid price of this pair is 26.6539, while the ask price is 26.6851, so the spread is 0.0312, or 31.2 pips.
It is also not uncommon for this currency pair to have movements of less than 20 pips per day, which means that traders will probably have to leave their trade open for at least a few days in order to make a profit.
This means that trading with a low spread is often a priority for Forex traders, as their trades can become profitable faster. This means that they can make a large volume of smaller trades instead of relying on larger trades to make money.
Working hours on the Forex market
Unlike many other financial markets, the international currency market operates 24 hours a day, 5 days a week. Holidays on the Forex market are only Saturday and Sunday. The foreign exchange market opens at 00:00 on Sunday against Monday and closes at 00:00 on Friday against Saturday.
The forex market is known as the over-the-counter market. This means that transactions are made directly between the countries that hold the currencies, instead of being managed through an exchange.
Because the Forex market is global, there is always a country in the world that is awake and trading. During these hours, the currency of a given country is most active and undergoes the largest movements.
Currency pairs with the participation of the US dollar are most active during working hours in the US (15: 00-23: 00)
European currencies such as the euro, the British pound and the Swiss franc undergo the greatest changes during European business hours (10: 00-18: 00)
The Asian currencies of the Asia-Pacific region, such as the Australian and New Zealand dollars, and the Japanese yen, will be most active between 02:00 and 10:00.
As a Forex trader, for you this means that you can trade when it is convenient for you. If you work during the day, there will be currencies available to trade before or after work. If you have children but are at home during the day, you can simply choose another currency. On the Forex market you can trade 24 hours a day, 5 days a week.