The basics of Forex
Forex (Foreign exchange market) is the market where buyers and sellers trade one currency for another. The trading is done in pairs. For example, euro is traded for US dollar, or frank is traded for lira.
Currency pairs are shown in the standard shortened form:
The goal of trading is to buy the first currency at the lowest price possible, and to sell it for the highest price possible (by converting it into another currency). Most currencies are managed (a mix of a fixed and a floating exchange rate) and some have a fixed exchange rate.
A managed rate means that the value of a currency is permitted to “float” between two set exchange values. If the currency’s value begins to move too close to one of the set values, the central bank of a particular country then would take actions. These actions would be directed at managing the float of the currency.
A fixed exchange rate means that the exchange rate of a currency is unchanging. However, this statement has an exception. The fixed exchange rate is unchanging unless the government or the central bank responsible for the currency takes actions to change it.
Forex trading became popular after the start of the 21st century. Technological advances, increasing access to the internet and faster connection speeds made Forex accessible to the wide public. Nowadays, the internet is full of learning materials, courses and free advice related to the complicated trading of currencies.
How does Forex work?
Trading currencies is the same as any kind of trading. Both a buyer and a seller have to be present for an exchange to occur.
Forex is an online marketplace where buyers and sellers can trade currencies. In online trading, fast order filling can mean the difference between profit and loss. Therefore, an access to a fast internet connection is required to facilitate trades. A computer with fast processing speeds will also help to get the best price when trading foreign currencies.
Buying one currency and selling it for another is rather simple. The trader just needs to open an account on a Forex platform. When the account is opened, the trader has to deposit money to start trading. Every Forex platform looks and operates differently, but order filling is generally the same:
- Go to the “New order” screen or option;
- Enter into the appropriate field or choose the currency pair you’ll be trading ;
- Enter or choose the amount (volume) of the currency you’ll be buying;
- Next, take care of the Stop loss. Stop loss is used for determining when the trade should be stopped. This tool is implemented to protect the trader from losing money.
- Enter the Take profit. It’s the amount of profit you want to make.
- Choose to sell or buy.
- Click “OK”. That’s it! You now have opened a trade.
Forex in numbers
It is estimated that every day, over 5.3 trillions US dollars worth of currency is exchanged in the foreign exchange market. How many Forex traders there are? There is no exact number, but calculations and estimations show that there are around 10 million traders (9.6 million). Every day, around 74 new traders (just in USA) join the Forex trading community. Around the same amount returns to trading Forex after a break.
The highest turnover in foreign currency trading is recorded in the most popular currency pairs. The 5 most popular Forex currency trading pairs are:
EUR/USD (euro/ US dollar); USD/JPY (US dollar/Japanese yen); GBP/USD (British pound/ US dollar); USD/CHF (US dollar/Swiss franc); AUD/USD (Australian dollar/US dollar).
US dollar is the total leader of Forex trading. It is present in all of the 5 most popular Forex trading pairs.
Is it possible to make money by trading currencies? Thousands of Forex gurus, advisers and e-book sellers would definitely say yes. You should remember, how else are they going to sell their services?
If we’re being serious, Forex can be both the easier and the harder way to make money whilst trading. If there’s not enough of a price change in a currency pair, that means the investors invested in that pair won’t be able to turn a profit.
Forex trading is highly dependent on the economies of different countries and their foreign policy. If a country experiences a recession, a slowdown in its output or worsening relations with its neighbours, its currency will lose value.
Traders should remember that a worth of a currency has been entirely subjective after the world moved away from basing currencies on gold. Even though currency value is based on the underlying economy, the exchange rates are still highly dependent on the public perception of the future one or another country.
That fact can also be used for making money through Forex. If a trader can predict the future public perceptions of a currency or a currency pair, he or she can also make money if the predictions turn out to be correct.
Forex trading infographics and learning materials always emphasize the technical side of currency analysis. Japanese candles, graphs, trends and other graphics are always at the forefront of Forex education. However, they mostly are just the indicators of underlying processes. And the indicators almost always are related to the fundamentals (in this case, economy and foreign relations) of a particular country and its currency.
If an aspiring Forex trader is familiar with the economies of the currencies he or she is going to trade and knows the main financial and economic trends happening in the world, then Forex trading shouldn’t be very difficult for them.
And learning about trading in foreign exchange markets hasn’t been easier. Just by entering “Forex free education” or “Forex analysis website” we’ll get thousands, if not millions, of completely free websites. Free websites that can help to learn what Forex trading is all about.
Currencies and combinations
All currencies can be traded on Forex. The most popular trading pairs are the ones with US dollar being one part of the pair. The US dollar is the most popular currency for Forex trades. Currencies and currency pairs in Forex are divided into three distinct groups: majors, minors, exotic.
Majors are the currency pairs which have the US dollar as one part of the pair. Majors are the most traded currency group in Forex. The 5 most popular currency pairs to trade in Forex involve US dollar. Moreover, the most traded currency group in Forex also contains the US dollar.
Minors are the currency pairs that do not contain the US dollar. They’re also known as “crosses”. Examples of minors are EUR/CHF (euro and the Swiss frank) and AUD/JPY (Australian dollar and the Japanese yen).
Exotic currencies shouldn’t necessarily be associated with far away lands. These are the currency pairs with one side of it being a major currency, and the other a currency from any other country (mostly from emerging economies). Exotic currencies have a lower trading activity and a lower demand for them. Examples of exotic currency pairs are EUR/ZAR (euro and the South African rand) and USD/THB (US dollar and the Thai baht).
Exotic pairs aren't always the currencies of tropical islands. Source: https://bit.ly/2JDpM9z, https://bit.ly/2DnleEh
Forex software, technicals
Online Forex trading platforms are the option for individual traders to trade foreign currencies. There are many different online trading platforms. Each one differs by their fees, technical parameters, and analysis abilities. When traders choose a Forex platform, they most often compare the minimum initial deposits the platforms require, their leverage (trader’s funds in comparison to the broker’s credit) and their spreads (the difference between the price you want to pay for a currency and the price sellers are willing to sell it at).
Forex trading platforms operate through an internet connection and sophisticated IT infrastructure. How they operate is fairly simple. They act as the vehicle for currency trading. Forex trading platforms provide information about currencies and fill orders of traders. Forex platforms also provide educational materials and signals related to currency trading.
Most Forex trading platforms are easily accessible through different websites and do not require any downloads. There are also Forex trading platforms that are downloaded onto a PC or used from an application on a smart phone. Nowadays, a trader can fill trade orders from anywhere in the world. They just need to have their smartphone and a reliable internet connection.
Forex software is a helpful and an essential tool for foreign currency trading. Forex trading software is based around the technical analysis of currency prices. Forex software is used for predicting price fluctuations of currency pairs and finding the best buying and selling opportunities. By using Forex software, Forex traders are be able to get more information out of the currency data and its graphical representations. Maybe graphical representations of data (e.g. Japanese candles) aren’t the ultimate analysis tool, but they help traders immensely in decision-making.
Software for Forex can be paid and free to use. The best way to find the right one is to determine what type of software the trader needs. Next, the trader should look at the reviews of the chosen software on review sites like trustpilot.com and others.
The Forex market is an online market. That means that traders who want to start trading foreign currency should be prepared to spend some time on their laptops or PCs. Yet, it’s probably worth for the potential gains Forex trading offers.
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