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A foreign exchange, better known as Forex or FX, is a global market where currencies are traded in order to make profit by changing forex rates. Being the world’s largest market, even larger than the stock exchange, Forex has a high level of liquidity. Therefore, it attracts many traders, both beginners and experienced.
Every day the forex market has approximately $5 trillion USD traded value, so it has the highest liquidity in the world. This means that you can buy a large amount of almost any currency during the trading hours. The Forex market is open round-the-clock 5 days a week – from Monday till Friday. Trading session begins first in Australia, then goes to Asia, after that starts in Europe and finally opens in the USA and continues until the markets close.
In summer, in winter the Forex market opens on Sunday at 9:00 pm GMT and closes on Friday at 9:00 pm GMT. In winter, trading hours are 10:00 am - 10:00 pm accordingly. Thus, currencies are traded at any time of day or night. Unlike other instruments, when a drop in the market leaves a trader with assets unavailable for trading, the Forex market can always find a buyer or seller.
There are hundreds of currencies in the world, and each is indicated by three letters. For example, the US dollar is USD, the EURO, the Swiss franc is CHF, the British pound is GBP and so on.
Going to the grocery, we exchange one valuable asset for another, for example, money for milk. The same is in the case for Forex trading – we buy or sell one currency for another. The paired currencies are referred to as one against another.
There are three types of Forex pairs: major, cross-courses and exotic pairs. The major pairs always contain the USD, and they are most often traded. The seven major pairs are EUR/USD, USD/JPY, GBP/USD, USD/CAD, USD/CHF, AUD/USD and NZD/USD. The cross-courses pairs consist of major currencies, except the USD, for example, EUR/GBP, CHF/JPY and others. The exotic pairs are made up of a major currency coupled with a cross-courses currency, for example, EUR/TRY, USD/NOK and others.
The most popular forex pair is the euro and the US dollar, or EUR/USD. The currency on the left is called the base currency: we want to buy or sell it. The currency on the right is called the secondary currency: we use it to make the transaction. Each forex pair has two prices: a sell price (ask) and a buy price (bid). The difference between them is called a spread. It represents the amount that brokers charge to open a position. The higher currency liquidity, the narrower its spread. The lower currency liquidity, the wider the spreads, as low liquidity leads to increased volatility. Consequently, an increased risk entails a wider spread.
As a rule, a quote is presented by four digits after the decimal point, for example, 1.2356. In the case of the Forex pair EUR/USD this means, that for every euro a trader wants to buy he should invest 1.2356 US dollars. Any change in the Forex rate is usually reflected on the fourth figure after the decimal point, known as a pip. Spreads, profits and losses are usually presented in pips.
Some other terms used in the Forex trading are long position and short position. They stand for ‘buying’ and ‘selling’ accordingly. A trader who believes that the asset price will rise is called a ‘bullish trader’. A trader who believes that the asset price will fall is called a ‘bearish trader’. Consequently, the terms ‘a bull market’ and ‘a bear market’ are used to describe the condition of the market.
A bull market is the condition of a market when prices are rising, while a bear market is a market with falling prices. Experienced traders choose their strategy on the basis of market’s condition and monitor all current events in order to predict changes in the market and make a profit. Previously, traders phoned their brokers and instructed them on actions to be made. Today traders make transactions themselves using special software, called a trading platform. Many platforms are accessed on computers, browsers and mobile phones. Each trader has his own trading strategy, so he needs a platform that will allow him to perform it most effectively.
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The broker provides traders with a leverage to enable them to hold trading positions larger than their own capital could allow. It is important to remember that profits and losses are determined by the position size. Therefore, leverage trading can increase both profits and losses.
The Forex market has high liquidity, due to high supply and demand rates. Traders make transactions based on financial and other economic events. Of course, when a currency is in great demand, it's value raises significantly compared to other currencies, and vice versa. Financial events are reports and statements by countries, central banks and other financial institutions, on such financial indicators as unemployment rate, interest rates and others. A decrease in the unemployment rate may indicate that the country has a stable economy, and this may lead to national currency strengthening.
Let’s go back to the popular forex pair – EUR/USD. After logging in the platform the trader checks ask and bid prices. For example, they are 1.2356 (ask), and 1.2359 (bid). The difference between them is 3 pips and it is a brokerage fee. If the trader predicts the euro rate increase he will open a buy position. Then he decides what amount of the currency he wants to buy, for example, 10,000 units. So, the price is $12,356, and with leverage it is $30.89. If the market assets really grow, as the trader has predicted, and the euro rate increases from 1.2356 to 1.2360, i.e. 4 pips, the trader will make a profit from this trade.
If it is a major currency, it may affect the exchange rate of other currencies. Before the financial events take place, traders speculate on its content. Then they open positions based on these speculations. All the events are reflected in the economic calendar.
When trading forex, like any other instrument, you should feel confidence. Profits can never be guaranteed, and any type of trading has its advantages and disadvantages, and even the risk of loss. At FinxTrade, we have a set of values which define our customer relationship. In this regard, we provide our customers with the best trading opportunities possible, such as multilingual customer service and the most modern and user-friendly trading platforms.
You can also use our educational resources in the Education section on out site. There you will find a large selection of articles, video tutorials and many other tools that can help you in trading. We know that sometimes trading causes a feeling of oppression and even anxiety, but we try to do all our best to prepare you for trading in the real world.
These educational resources allow you to trade with peace of mind. Remember that FinxTrade is always on your side. We provide you only with the best instruments and tools and do our best to regularly introduce innovations and improve them for you.