What is Forex – definition, and interpretation
First, let's discuss the Forex market – what is it?
The Forex market is the foreign exchange market where currency pairs such as EURUSD or GBPUSD are traded.
The term Forex comes from Foreign Exchange.
Forex market Is an over-the-counter market where investors or speculators buy and sell currency pairs.
The Forex market is a foreign exchange market, and currencies, unlike most other market assets, are economic instruments, since they are economic indicators. Basically, if countries were companies, currencies would be their shares.
Forex market fundamentals
In recent years, buying and selling foreign currency, as well as speculation in the Forex market, has reached a new, more popular level. This situation is due to many factors.
What is Forex Market – Trading Basics
What is the Forex market and what are the basic concepts found in it?
Knowing Forex terms will not make you a great trader, but it will help you understand the information you need to trade successfully.
Here are the most important concepts in Forex:
- Currency pairs
- Forex trading
- Pip
- Spread
- Margin
- Leverage
- Forex liquidity
- Swap
- Lot or size of the contract
- CFD
- Forex trading platform
Any investor who wants to participate in currency trading needs to understand how Forex works and the basic concepts of this market. Testing Forex on a demo account is one of the ways to learn and understand Forex better.
Who trades on Forex
The most important players in the foreign exchange market are:
- Central banks
- Other banks
- Hedge funds
- Investment funds
- Brokers
- Professional and individual investors
Among the participants in the foreign exchange market, central banks have the greatest weight in the formation of exchange rates. The central bank is in fact the supplier of money for the country in which it operates and, therefore, generates the supply in this market. His decisions have a very important impact on the prices of currency pairs.
Small investors, like individual traders, have very little influence on the Forex market, but this influence is obvious due to their large number.
To understand forex, we need to know that supply and demand for currencies are constantly changing and we can see price movement on a tick chart on the trading platform.
Understanding the Forex market
In economics, supply and demand is a model that explains price formation in a free, competitive market. The same principle applies to the foreign exchange market.
Whenever a currency is bought, a demand is created in the market that drives up the price.
Likewise, every time a currency is sold, a surplus of supply is created, which pushes the price of the currency down.
The impact of each purchase and sale in the foreign exchange market is directly proportional to the trading volume of each transaction.
The equilibrium price philosophy is the key to understanding how online currency trading works, as all economic events around the world have an impact on the market.
Factors affecting the Forex market
Several factors affect the foreign exchange market and currency prices:
- Interest rates
- Inflation
- Political, economic events and natural disasters
- Economic growth rates
- Supply and demand of a currency pair
What is Forex Trading
Forex trading is the activity of buying and selling currencies.
Forex trading is conducted for speculative purposes or currency hedging through the trading platform.
What is Forex Trading?
First, it is an income opportunity available to anyone with a computer and the Internet.
Trading is the exchange of one asset for another.
Forex trading involves the exchange of financial assets.
Governments, businesses, and retail investors participate in this market, which is literally open 24 hours a day.
Thanks to this active participation and availability, the Forex market is the most liquid and accessible market in the world.
What is a pip in Forex?
One of the basic concepts in everyday Forex traders is the concept of pip (point in Forex). A pip is the smallest division of the line of quotes, the minimum unit. For example, if the rate was EUR / USD 1.1234 / 1.1238, and became EUR / USD 1.1240 / 1.1245, then we see an increase in the bid price by $ 0.0006 or 6 pips, while the ask price increased by 7 pips.
The next concept in our vocabulary is trading volume. This is the number of units of the transaction volume (measured in lots). One lot in the Forex market is worth 100,000 units of the base currency.
If you want to buy 1 lot of EUR / USD, this means that you buy 100,000 euros for dollars when you open an order to exchange them back when you close.
It does not matter what the currency of your personal account is, your broker will be able to convert any currency. Even if your account is, for example, in euros, you can buy lots on the NZD / JPY pair.
What currencies are traded on Forex
This forex trading guide would not be complete without an overview of the most popular assets available to a trader.
The most popular currency pairs in the world – the US dollar, euro, pound sterling, Japanese yen, and Swiss franc – are included in the group of major currency pairs: EURUSD, GBPUSD, USDJPY, and USDCHF.
There are three other currencies that are common in Forex trading: the New Zealand dollar, the Canadian dollar, and the Australian dollar. If they are linked to the US dollar, we get a group of currency pairs: NZDUSD, USDCAD, and AUDUSD.
All other currency pairs in the Forex market are commonly referred to as “exotic currency pairs” and account for less than 10% of all foreign exchange transactions.
Forex Quotes – Explanation
The currency pair is a key concept in the basics of Forex trading.
For example, the EUR / USD pair.
The euro is called the base currency here. The US dollar is called the counterparty currency. The valuation of the base currency against the counterparty gives us the Forex quote.
If we look at EURUSD or other currency pairs on the trading terminal, there are two numbers, the ask price, and the ask price.
They look like this: EUR / USD 1.1234 / 1.1240. This quote tells us that we can buy Euros for $ 1.1240 because that is the amount the bank is asking for – the ask price.
At the same time, we can sell one euro for 1.1234 USD – the offer price. It is easy to see that, in general, the bank buys a currency at a lower price and sells currency at a slightly higher value. Banks can do this because they have more influence than brokers.
Open demo Forex account
You cannot just buy or sell EUR / USD, as you would, for example, with a company's stock. This is due to the fact that the EUR / USD currency pair does not exist. There is the currency itself, not the pair. Traders simply speculate on future price movements without actually buying currencies.
In Forex, profit is obtained by increasing or decreasing the value of a certain currency compared to another. Let's say you buy Euros and sell US Dollars (using the EUR / USD currency pair). To make a profit, you need to sell US dollars as soon as the euro is appreciated against the dollar.
There are two things to consider. First, traders never buy or sell physical currency. Secondly, buying and selling occur in all foreign exchange transactions.
