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What is Forex? Explanation of currency trading

The currency market or forex (FX), as it is commonly known, is a market that makes it easy to buy and sell different currencies. This operation is carried out in a decentralized manner (OTC) thanks to the interbank market.



Without knowing it, you most likely have already participated in the foreign exchange market, either when you ordered imported shoes, or more directly, by having acquired foreign currency when you were vacationing abroad. Investors are attracted to the forex market for several reasons, among which the following stand out.

  • The size of the forex market
  • Wide variety of currencies to be traded
  • Different levels of volatility
  • Low transaction costs
  • Operational 24 hours a day, 5 days a week

This article will benefit all traders regardless of their level of experience. Whether you are new to the forex market or looking to expand your knowledge, this article will provide a solid foundation for the forex market.

The currency market or forex (FX), as it is commonly known, is a market that makes it easy to buy and sell different currencies. This operation is carried out in a decentralized manner (OTC) thanks to the interbank market.

Without knowing it, you most likely have already participated in the foreign exchange market, either when you ordered imported shoes, or more directly, by having acquired foreign currency when you were vacationing abroad. Investors are attracted to the forex market for several reasons, among which the following stand out.

  • The size of the forex market
  • Wide variety of currencies to be traded
  • Different levels of volatility
  • Low transaction costs
  • Operational 24 hours a day, 5 days a week

This article will benefit all traders regardless of their level of experience. Whether you are new to the forex market or looking to expand your knowledge, this article will provide a solid foundation for the forex market.




 

EXPLANATION OF THE FOREX MARKET

Simply put, the currency market, since it is subject to supply and demand, works like most other financial markets. Using a very basic example, if there is a strong demand for US dollars from European citizens, they will exchange their euros for dollars. The value of the US dollar will go up while the value of the euro will go down. Note that this transaction only affects the EUR / USD pair and will not, for example, cause the USD to fluctuate against the Japanese yen.

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WHAT MOVES THE FOREX MARKET?

In reality, the above example is just one of many factors that can move the forex market. Other factors include larger events such as the election of a new president, or country-specific economic factors such as the prevailing interest rate, GDP, unemployment, inflation, and the debt-to-GDP ratio, to name a few. . Most traders use an economic calendar to keep up with these and other relevant economic publications that can move the market.

WHAT MAKES THE FOREX MARKET SO ATTRACTIVE?

The foreign exchange market allows large institutions, governments, retail traders and other individuals to exchange one currency for another and is done through the interbank market (between banks).

The benefit of trading among global currency banks is that FX trading can be operated 24 hours a day, 5 days a week. At the end of the Asian trading session, European and British banks connect before the United States enters into operation. The full day of trading ends when the US session leads to the Asian session the next day.

What makes this market even more attractive to traders is that it is by far the most liquid market in the world, with an average daily trading volume of $ 5.1 trillion, according to the Bank for International Settlements (2016). This means that traders can easily enter and exit positions, as there are many buyers and sellers willing to trade currencies.

WHAT IS CURRENCY TRADING AND HOW DOES IT WORK?

Many people wonder how to make money trading Forex. Fortunately, the fundamentals behind currency trading are pretty straightforward. If you think the value of a coin is going to rise (appreciate), you buy the coin. This is known as going “long.” If you feel the currency is going to go down (depreciate), you sell that currency. This is known as going “short.”

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WHO TRADES IN THE FOREX MARKET?

There are essentially two types of traders in the forex market: hedgers and speculators. Hedgers always seek to avoid extreme movements in the exchange rate. Think of large conglomerates like Exxon and how they seek to reduce their exposure to currency movements in the countries where they have business exposure.

Speculators, on the other hand, are looking for risk and are always looking for exchange rate volatility to take advantage of it. Among them are the large trading desks of large banks and retail traders.

READING A FOREX QUOTE

All traders need to understand how to read a forex quote, as this will determine the price at which you enter and exit the trade. Looking at the currency price below, the first currency in the EUR / USD pair is known as the base currency, which is the Euro, while the second currency in this pair, the USD, is known as the variable or quoted currency. .

For most currency markets, prices are listed to five decimal places, but the first four are the most important. The number to the left of the decimal point indicates a unit of the variable currency, in this example it is USD and therefore it is $ 1. The next two digits are cents, so in this case 13 cents.

It is key to note that the number in the fourth decimal is known as “pip”. If the euro depreciates 100 pips against the dollar, the new sale price will reflect a price of 1.12528, since the purchase of 1 euro will cost less in dollars.

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