Forex is the short form of Foreign Currency Exchange. Forex is the global marketplace in which one can trade two currencies against each other in real-time.
The user who sells and buys currencies is known as a forex trader. If a trader can speculate that a particular currency will become stronger compare to another currency. And he ends up correct, then the trader can make some profit by buying that currency.
Almost everyone is participating in the forex market either by consuming a foreign good, traveling to another country, or doing business with foreign countries.
Say you are in the US and you are buying Japanese products from a shop. Though you are paying US dollars to purchase that item but the importer had to pay Japanese yen to the producer in Japan to buy that good.
You are traveling to Australia from the US. In the airport, you want to change some of your US dollars to Australian dollars. You will find currency exchange booths at the airport. In those booths, you will find a big screen that shows the exchange rates of various currencies. You exchanged 100 US dollars with 140 Australian dollars. Congratulations, you just have done a forex trade. It’s that simple.
Forex market has drawn attention to a large number of traders for various reasons.
- Flexible trading hours. Market is open for 24hrs a day and 5 days a week.
- You can trade variety of currenciesl
- Trading cost is comperativle low.
- Market is volatile, that open up opportunties to do trade
- The size of FX market is quite big
What is forex?
Forex or FX is the short form of foreign exchange market. It is the largest financial market place in the world to trade currencies.
It is a unique decentralized marketplace in which the currencies exchange hands. This trading occurs over the counter (OTC) via the interbank. The price of currency changes in every millisecond. The market is continuously moving 24hrs a day.
Most of the currency transactions are happening in the global forex market place. The reason for these transactions is limitless.
Currently, traders are buying and selling currencies are hoping that market will follow their speculation and make some profit from their trade.
Like any other market, the price of a currency is subject to supply and demand. If there is a strong demand for the Australian dollar from US citizens and they want to exchange their US dollars to Australian dollars. Demand for the Australian dollar will rise and that will increase the price of the Australian dollar over the US dollar.
What you can trade in Forex?
In forex, you will trade currencies as a pair. You can trade all the major currencies of the world. There are a number of currency pairs in forex, like EURUSD, AUDUSD, USDJPY, EURCHF, etc.
In a currency pair, like EURUSD, the base currency is EUR. The second currency US, is the variable or quote currency.
When you buy EURUSD,. It means you are buying EURO and selling USD.
What moves the Forex Market
Currency prices are extremely volatile. The prices are changes continuously. Every economical event of a country impacts the currency price of that country. Like change of employment, currency interest rate, GDP, inflation, etc. The market also moves for various geo-political events and news like a war between the US and Iraq.
Size of the forex market
Currently forex market has 7 trillion trade volumes per day. The trade volume of the New York Stock Exchange (NYSE) is $23 billion, the Tokyo Stock Exchange is $19 billion, and the London Stock exchange is $8 billion.
Currently, NYSE is the biggest stock exchange in the world. If you compare the size of the NYSE market along with the global forex market, then the size of NYSE looks ridiculously smaller.
But there is a catch; the 7 trillion trade volume is for the whole global market place. The size of the spot market is only around $2 trillion per day. Trading volume per day for the retail segment of the fx market is only around $200-$300 billion.
Do not go with the $7 trillion market hype of forex. It is quite misleading for new traders.
Forex trading hours
Forex market rarely closes. It’s virtually open round the clock. Forex market is open for 24hrs a day and five days a week. Market closes during the weekend. The market opens with the New Zealand market and ends with the New York market. Forex market does not close at the end of each business day. Instead, it just shifts the tradings to the different financial centers around the world.
Forex trading key terms
- Curreny Pair: In forex, you have to trade currency as pair. You can not sell or buy currency individually. EURUSD is the most known currency pair. Buying EURUSD means, you are buying EURO and Selling the US dollar.
- Base Currency: The first currency in the pair is known as the base currency. In the EURUSD currency pair, EURO is the base currency.
- Variable or Quote Currency: Second currency in the pair is the variable or quote currency. In EURUSD, USD dollar is the variable or quote currency.
- Long: When you buy a currency pair, you made a long position in forex.
- Short: when you sell a currency pair, it means you made a short position in forex.
- Bull: when the price of a currency pair is going up then you can say that the pair is bullish.
- Bear: When the price of a currency pair is going down then you can say that the pair is bearish.
- Bid price: In forex, the bid price is the highest price to buy a currency. When you are buying a currency pair, you have match with the bid price to buy that pair.
- Ask price: Ask or asking price is just the opposite of the bid price. When you are selling a currency pair or closing a trade, you have to match the asking price.
- Spread: There is a difference between the bid price and the asking price. This price gap is known as the spread. Normally brokers make a profit from the spreads.
- Pip: Pip is the smallest price movement unit for a currency pair. Pip is the short form of “Percentage in Point” or “Price Interest Point”.
- Leverage: By using leverage, one can place a trade position by using a fraction of the full value of the trade. It allows users to place a bigger trade by using a small amount of capital. It will give you a bigger profit on the other hand it will give you bigger losses too.
- Margin: To open a leveraged position, you need a bigger amount than your original capital. You need to lend money from the broker to place a leveraged position. Margin is the difference between the full value of the trade position and the money being lent by the broker.
- Margin call: In a leveraged position, when your total capital tends to go below the amount you lent from the broker as a margin, a margin call occurs. When you hit by a margin call, all of your running trade will be closed by the broker.