The forex (foreign exchange) is a network within which buyers and sellers exchange a currency at a set price and is the means by which individual traders, companies and central banks convert one currency into another. If you have traveled abroad, you too have probably made a forex transaction.
These transactions are often executed for practical reasons, but most currency conversions are aimed at making a profit. The volume of currencies converted each day is capable of making the price movements of some currencies extremely volatile. This volatility is one reason why forex holds such great appeal for investors. However, the greater opportunities for profit also implies greater exposure to risk.
Unlike stocks or commodities, forex transactions do not take place on an exchange. In fact, currencies are traded directly between two parties in what is called an over-the-counter (OTC) market. This means that the forex market operates through a global network of banks, spread over four major trading centers in different fusors: London, New York, Sydney, and Tokyo. Moreover, since there is no single center through which all trades must pass, it is possible to trade 24 hours a day.
There are three different types of forex markets:
Is the physical exchange of a currency pair, which takes place at the same time as the trade is agreed ('on the spot' or 'spot') or within a short time frame.
Is a contract in which the sale or purchase of a given amount of money in a currency is fixed at a certain price, by a certain future date.
Is a contract in which the sale or purchase of a given amount of money in a currency is fixed at a specific price on a specific future date. Unlike the forward market, a futures contract is legally binding.
Most traders trade on forex price movements without actually taking delivery of the currency itself. They speculate on prices and make forecasts of exchange rates in order to take advantage of market movements.
A base currency is the first currency shown in a currency pair, while the second currency is known as a quoted currency. In forex trading, the sale of one currency always involves the purchase of another, quoted currency in the pair. The price of a currency pair is equivalent to the amount of the quoted currency needed to buy one unit of the base currency.
Each currency in each pair is denoted by a three-letter code that, together with the two-letter abbreviation denoting the region, forms the currency abbreviation. For example, GBP/USD represents a currency pair that involves buying pounds and selling U.S. dollars.
The most common pairs are:
These are the seven pairs that account for 80% of global trades: EUR/USD, USD/JPY, GBP/USD and USD/CHF are some of the most important pairs.
Are traded less frequently and usually, contain the most important currencies that are quoted against each other and not against the U.S. dollar, such as the EUR/GBP, EUR/CHF and GBP/JPY pairs.
A major currency against that of a minor or emerging economy. For example, USD/PLN, GBP/MXN and EUR/CZK.
These are forex pairs classified on regional scales, such as Scandinavian or Asia-Pacific pairs: EUR/NOK, AUD/NZD and AUD/SGD.
The forex market includes all global currencies so it is very difficult to make accurate exchange rate forecasts because of the many factors that influence price movements. However, as with most financial markets, forex depends on the movements of supply and demand so it is critical to understand all the factors that influence market fluctuations.
Supply is controlled by central banks, which can take measures that significantly affect the price of the currency. For example, quantitative easing involves an infusion of money into an economy and, therefore, can cause the price of a currency to fall.
Market sentiment, in response to news and financial events, can play a primary role in determining the price of currencies. If investors believe that a particular currency will take a certain direction, they will trade accordingly, potentially prompting others to do the same, thus influencing supply and demand.
Banks and investors tend to put their money into sound economies. Therefore, if positive news involves a particular area, investment will be encouraged by it, increasing demand for that region's currency. Unless there is an equivalent increase in the supply of the currency as well, the imbalance between supply and demand will lead to an increase in price. Similarly, negative news can inhibit investment, leading to a decline in the price of the currency. For this reason, currencies usually reflect the health of an economy.
The process of ‘mining’ cryptocurrencies involves checking the most recent transactions and then adding new blocks to the blockchain.
There are several ways to trade forex and they all work the same way: buying one currency simultaneously involves selling another. Forex trading is traditionally done through brokers but, with the rise in popularity of online trading, you can take advantage of price movements through derivative instruments such as Turbo24, CFDs, barriers, and vanilla options.
Turbo24, CFDs, barriers and vanilla options are leveraged products that allow you to open a position by investing only a portion of the total value of the trade. Unlike products that do not use leverage, you do not have to actually own the asset, so you can trade in both up and down markets.
Leverage allows for increased profits, but it also implies the risk of incurring high losses in the event of unfavorable market movements.
Currencies are traded in lots, which are units of currencies used in order to standardize forex trading. Because forex movements are small, lots are generally quite large: a standard lot is equivalent to 100,000 units of a currency. Individual traders may not have as much capital as 100,000 pounds, dollars or euros available for each individual order. For this reason, many forex brokers make leverage available to clients.
Leverage allows you to gain exposure to a substantial amount of money in a currency without having to pay the full value of the trade. The level of leverage depends on the financial product you decide to use. When trading with Turbo24, barrier and vanilla options, the cost of opening the position is paid up front and represents the risk of the entire trade. Usually the opening price is lower than the value of the underlying asset and this generates leverage.
For CFDs, a small deposit called margin is paid when the position is opened. When you close a leveraged position, your profit and loss are based on the total value of the trade.
Leverage allows you to amplify your chances of profit, but the risk of loss could also increase by exceeding your deposits. For this reason, it is extremely important to learn how to manage risk and protect your investments from the possible consequences of leverage.
Margin is a key factor in leveraged trading. Margin is the portion of funds required to open a leveraged position. When trading forex and using leverage, remember that your margin requirement may change depending on your broker and position size.
Margin is generally stated as a percentage of the entire position. Therefore, a trade on EUR/GBP, for example, might only require a margin of 3.33 percent of the total value in order to open the position. Instead of £100,000, you will only need to deposit £3300.
Pips are the units that measure the movements of a forex pair. Usually a pip is equivalent to a shift of one unit to the fourth decimal place of a forex pair. Therefore, if the GBP/USD pair moves from $1.35361 to $1.35471, it has moved one pip. Decimals after the pip are called fractional pips.