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WHAT IS FOREX AND HOW DOES IT WORK?

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Forex is the conversion of one currency into another.It's also reffered to as foreign exchange or Fx.

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What is forex trading? 
Forex trading is the means through which one currency is exchanged into another. When trading forex, you're always trading a currency pair i.e selling one currency while at the same time buying another. 
Each currency in the price is always listed as a three-letter code with two letters representing the region and one standing for the currency itself. For instance, USD stands for the US dollar and JPY stands for the Japanese Yen.
In the USD/JPY, you're buying the US dollar by selling the Japanese Yen. The euro vs US dollar (EUR/USD), the British pound against the euro (GBP/EUR) and the the British pound versus the US dollar (GBP/USD) are the most traded Fx pairs. For simplicity, most of these pairs are split into categories. 
  • Major pairs - most frequently traded which include EUR/USD, USD/JPY, GBP/USD and USD/CHF
  • Minor pairs-less frequently traded featuring the major currencies against each other instead of the US dollar.They include EUR/GBP, EUR/CHF, GBP/JPY
  • Exotics - a major currency against one from a small or emerging economy. They include USD/PLN, GBP/MXN, EUR/CZK.
  • Regional pairs - pairs classified by region such as Scandinavian or Australasia. They include EUR/NOK, AUD/NZD, AUD/SGD

How does forex trading work?


Forex trading is unique to the the stock market in that there are no centralized exchanges, the institutional forex market is run by a global network of banks and other organizations. The forex trading market is open for 24 hours for 5 days. It is closed on Saturday and Sunday. Because of the 24 hour cycle, a trader can buy and sell currencies at any given point of time. Transactions are spread across four major forex trading centres in different time time zones, London, New York, Sydney and Tokyo.

Forex pricing - base and quote 
The first currency listed in a forex pair is called the base while the second currency is called the quote currency. 
The price of a forex pair is how much one unit of the base currency is worth in the quote currency. 


In the above example, GBP is the base currency and USD is the quote currency. If GBP/USD is trading at 1.45241 then one pound is worth 1.45241 dollars.
If the pound rises against the dollar then a single pound will be worth more dollars and the pairs price will increase. If it drops, the pairs price will decrease. So if you think that the base currency is going to strengthen or rise against the quote currency you can buy the pair. If you think it will weaken, you can sell the pair.


What is leverage in forex trading?

When trading with leverage you get increased exposure to financial market without having to invest much capital. You don't need to pay the full value of your trade upfront. Instead you put down a small deposit known as margin. Your profit or loss is based on the full size of the leverage. Leverage therefore comes with the ability to make you greater profits all the same you risk losing much that can even exceed your initial deposit.


What is margin in forex trading?
Margin simply refers to the initial deposit you put up to open and maintain a leveraged position. 
The margin requirements changes depending on the broker and the size of the trade. It is usually expressed as a percentage of the full position. So a trade on EUR/USD for example might only require a deposit of 3% of the total value of the position for it to be opened. This means that while you are still risking $10000 you'd only need to deposit $300 to get the full exposure.


What is pip in forex trading?

Pips are units used to measure movements in a forex pair.It usually refers to a movement in the fourth decimal place of a currency pair. So if EUR/USD moves from 1.45241 to 1.45251 then it has moved a single pip. However there is an exception to this in the case where the quote currency is listed in much smaller denomination. In such  circumstances , a movement in the second decimal place makes up a single pip.So if EUR/JPY moves from ¥172.374 to ¥172.384 it has moved a single pip.

 What is the spread in forex trading?
The spread in  forex trading is the difference between the buy and sell prices granted for a forex pair. If for instance, the buy price on EUR/USD was 1.4576 and the sell price was 1.4571 then the spread is 5 pips.


What is a lot in forex trading? 

Lot represents the size of your trades in forex. In simple terms, it's the number of currency units you will trade in forex. There are four main types of lots.
  • Standard lot
  • Mini lot
  • Micro lot
  • Nano lot


What moves the forex market?

Forex is primarily driven by the forces of supply and demand just like other financial markets. For successful forex trading one has to make trading decisions based on some types of analysis with the most preferred methods being technical or fundamental analysis.

The general logic behind fundamental analysis is that the strength of a country's economy at present and future has the potential to strengthen that country's currency. 
Technical analysis involves studying the price movement over time. 

Comments

  1. UnknownApril 9, 2020 at 7:45 AM

    good and informative information

    ReplyDelete
    Replies
    1. Dennis cullan April 9, 2020 at 10:51 AM

      Thank you for the positive comment. Be sure to subscribe to get future updates.

      Delete
    2. UnknownApril 14, 2020 at 8:04 PM

      thank you was nc to read worthy

      Delete

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