What Is Forex ? - Doo Prime News
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What Is Forex ?

What is Forex (FX)?  

Foreign exchange or better known as forex can be identified as a marketplace where buyers and sellers transfer multiple national currencies between each other at an agreed price. By that, it means individuals, companies, and central banks trade currency with one to another simultaneously. To simplify it, it is like exchanging currency when you are travelling abroad.   

Foreign exchange is usually carried out for spending in foreign countries but in this case, individuals or companies aim to earn a profit from the currency conversion. The amount of currency converted daily determines the price movement of the currencies which can be highly volatile. It is the volatility of bringing about a greater chance of high profits, while also increasing the risk that interest the traders. 

The Forex Market  

The forex market is the largest, most liquid market in the world, with no centralized location. It is based solely on electronic networks of banks, brokers and at times institutions, alongside individual traders. Forex trading takes place directly between two parties, in an over the counter (OTC) market, unlike shares or commodities.   

Since there is no central location, traders are allowed to trade 24 hours a day. The forex financial market is operated by an international network of banks, ranging across four major forex trading centres in different time zones: London, New York, Sydney, and Tokyo.   

There are three different forms of forex market, including spot forex market, forward forex market and future forex market. The spot forex market refers to the physical trading of a currency pair with instant delivery on a specified spot date or in simple term, ‘on the spot’ – or within a short period of time. The forward forex market sets the amount of a currency for future delivery or within a range of future dates through a contract. The future forex market is when a given contract is agreed to trade a given amount of a certain currency at a fixed price alongside a date in the future.   

The difference between a forward and a future forex market is that a forward contract can be customized to fit a trader’s requirement while future contracts have standardized features in terms of their contract size and maturity. However, most traders who speculate on forex prices are less likely to plan on taking delivery of the currency itself, instead, they take advantage of price movements in the market by making exchange rate predictions.   

Forex Trading Basic Terms  

The most common currencies traded is the Euro vs the American Dollar (EUR/USD). The currency on the left is the base currency, which signifies the currency traders wish to buy when they are trading the forex pair. While the one on the right is the second currency, also known as the quote currency which is the currency traders are selling when they trade the forex pair.   

There are two prices for each pair, the price for selling the base currency is referred to as ask while the price for buying it is referred to as bid. With that, the difference between them is called a spread, and it is the amount brokers charge to open the position.  

When a high amount of currency is traded (high liquidity), its spreads will be narrower. The rarer the pair is, the broader the spreads will be, since lower liquidity usually entails increased volatility. The increased risk might consequently entail a wider spread.  

Standardly, a quote will be presented with four decimals places, for example, 1.3561. Thus, EURUSD signifies for each Euro the trader wishes to trade, he will have to invest 1.3561 US dollars. Any change in the currency value will usually be seen on the fourth figure after the dot, mainly known as a pip. The spread, gains, and losses will usually be presented in pips.   

Forex Pairs  

It is useful for traders to understand the concept of the currency pairs and what they signify. When currencies are traded, they are always listed in pairs, for example; USD/CAD, EUR/USD or USD/JPY. These refer to the U.S. dollar (USD) versus the Canadian dollar (CAD), the Euro versus the USD and the USD versus the Japanese Yen (JPY).   

A market price is correlated to each forex pair. By that, the price signifies how much of the second currency it requires to buy one unit of the first currency. If the price is associated with the GBP/USD pair, it means GBP is the base currency and USD is the quote currency. Therefore, when GBP/USD is trading at 1.35361, then one pound is worth 1.35361 dollars.   

Forex Lots  

Currencies are traded in lots in the forex market, referred to as micro, mini, and standard lots. A micro lot signifies 1000 worth of a given currency, a mini lot is 10,000 and a standard lot is 100,000. Hence, this is different from exchanging currencies in the bank for your trip. In the electronic forex market, trading occurs with a set of block currency where you are able to trade as many blocks as you please. For instance, traders can trade six micro-lots (6,000) or four mini lots (40,000) or even up to 80 standard lots (800,000).   

Leverage Trading  

Leverage is given by the broker for traders to gain exposure to hold trading positions to a large amount of currency without having to pay the full value of the trader’s trade upfront.   

It is essential to be aware that the profits and losses are based on the position size, and as leverage trading can magnify profits also losses can be enhanced.   

What affects the Forex Market?  

The forex market has high liquidity, due to a rise in supply and demand rate. Financial events, as well as general events, can determine how traders apply transaction. Of course, when a currency will be on high demand, its value will also raise comparing to the other currencies.   

Financial events are recurrent statements by countries, central banks or other financial institutions, on topics like the unemployment rate, manufacture numbers and so on. A drop in the country’s unemployment rate can indicate that the economy is strong, and this can lead to an increase in local currency.  

On the condition that it is a major one, it will affect other currencies. Thus, before the event takes place traders speculate on its content and determine these speculations open positions. Every event can be seen and followed on the economic calendar.   

The main takeaways of forex   

  • The forex market is a network, available for trading 24hours a day, five days per week, except for when all markets are closed for a holiday.   
     
  • Individuals or companies can open a forex account and then trade currencies. While the profit and loss results vary from the difference in price the currency pair was bought and sold at.   
     
  • Forex is the largest financial market in the world.   
     
  • When currencies are traded, they are always listed in pairs. (EUR/USD) 
     
  • Currencies are traded in lots in the forex market, referred to as micro, mini, and standard lots.  
     
  • Forward and futures are another option to participate in the forex market. Forward are customizable with the currencies exchanged after expiry. While futures are not customizable and are more readily used by speculators. However, the positions are often closed before expiry (to avoid settlement).  
     
  • Most traders who speculate on forex prices are less likely to take on the delivery of the currency itself, instead, they take advantage of price movements in the market by making exchange rate predictions or profiting on price differences in currencies over time.
  • Leverage is given by the broker for traders to gain exposure to hold trading positions to a large amount of currency without having to pay the full value of the trader’s trade upfront.  
  • The forex market is driven by the forces of supply and demand and it is important to gain an understanding of the influences that drives price fluctuations here. 
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