What is forex trading?
Forex
Forex trading is when buying or selling one country’s currency in exchange for another. In other words, it is a network of buyers and sellers, including individuals, companies and central banks, who exchange currencies at an agreed price.
Forex Market
With a trading volume of $6 trillion per day, the forex market is one of the most liquid markets in the world. What makes it unique is that there isn’t a central marketplace to exchange currencies. Instead, trading forex occurs electronically, over-the-counter (OTC) via computer networks between traders globally.
Flexibility
The market is open 24 hours a day, five and a half days a week, and currencies are traded around the globe in the major financial centres of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney across different time zones.
Leverage
Traders have the ability to trade CFDs using leverage, which enables them to enter a trade of higher value while investing a smaller amount. To put is simply, leverage is when using borrowed money to invest in a currency, stock, or security. However, leverage can also entail risks and expose you to higher losses.
How to read a currency quote?
In order to get into forex trading, traders need to be able to read and understand a currency quote. To start with, a forex quote consists of a currency pair and gives you information on the currencies involved in the trade. The first part of the pair is called the base currency while the second one is called the quote currency. The first part always equals 1. Taking one of the most commonly used currency pairs, the EUR/USD= 1.3600/05 as an example, there is also the bid and ask price. 1.3600 is the bid price, meaning that you can sell 1 EUR for 1.3600 USD, while 05 is the ask price meaning that you can buy 1 EUR for 1.3605 USD.
There are also two other terms called spreads and pips. The latter is a unit of measure, and it’s the smallest unit of value in a forex currency quote. So, in the example above, the difference between the bid and ask price is 5 pips. Their difference is called the spread.
If you want to open a long position, you trade at the buy price, which is usually a little higher than the market price. On the contrary, if you want to open a short position, you trade at the sell price, which is slightly lower than the market price.
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Basic forex terms
Lot
As commonly known, currencies are traded in lots which are numbers of units of a financial instrument that are traded on an exchange. Lots tend to be very large. For example, a standard lot is 100,000 units of the base currency which makes it difficult for most individual traders who don’t have 100,000 pounds, or related currency, to place on every trade. As a result, almost all forex trading is leveraged.
Margin
Margin refers to the initial deposit you use to open and maintain a leveraged position and is a key part of leveraged trading. Keep in mind that margin requirements change depending on your forex brokers, and the size of your trade. Margin is usually presented as a percentage of the full position, therefore, in the EUR/USD example, it might only take 1% of the value of the position in total in order for it to be opened.
Factors that move the forex market
The forex market is made up of currencies from all around the globe and forex is primarily driven by supply and demand, so it is vital to be aware of the factors affecting market prices. Exchange rate predictions are difficult to make due to these various factors that contribute to price fluctuations, including banks, news reports, economic data etc.