Foreign exchange, more commonly known as Forex or FX, is the simultaneous buying of one currency and the selling of another one. As the biggest financial market in the world by far, larger than the stock market or any other, there is high liquidity in the forex market. Therefore, the forex market attracts many traders, beginners and experienced alike.
THE FOREX MARKET
With approximately $5 trillion USD traded in the market every day, the forex market has the highest liquidity in the world. Basically, this means that one can buy almost any currency he wishes in high volumes while the market is open. The forex market is open 24 hours, 5 days a week – Monday to Friday.
The forex market starts time during the summer is on Sunday at 9:00 pm GMT and ends at 9:00 pm GMT on Friday. In the winter it’s 10:00pm-10:00pm accordingly. This results in currencies being traded at all times, day or night. Unlike some other instruments, where a downfall of the market could leave traders with untradeable assets, the forex market can always find a buyer or a seller.
There are hundreds of currencies in the world, and each has a three-letter symbol. American Dollars are USD, Euros are EUR, Swiss Francs are CHF, British Pounds are GBP and so on. Currencies are divided into two main groups – Major currencies and minor ones. The major currencies are derived from the most powerful economies around the globe – the US, Japan, the UK, the Euro Zone, Canada, Australia, Switzerland, and New Zealand. Pairing two currencies will create a currency pair, for example, EURUSD
FOREX TRADING BASIC TERM
The most popular pair traded is the Euro vs. the American Dollar or EURUSD. The currency on the left is called the base currency (also called primary) and is the one we wish to buy or sell; the one on the right is the quote currency (also called secondary) and is the one we use to make the transaction. Each currency pair has two prices – the price of selling (bid) and a price for buying (ask). The bid price represents the price your broker is willing to buy the base currency from you. It is the best price you can sell the currency to the market. The ask price, on the other hand, is the price your broker is willing to sell the base currency and thus means is the best price you can buy the base currency from the market. The difference between the two prices is known as the spread.
The more a currency is traded, the narrower will be its spreads. The rarer the pair is, the wider the spreads will be.
Usually, a quote will be presented with four numbers after the dot, for instance, 1.2356. In the case of EURUSD, it means for every Euro the trader wishes to buy he will have to pay 1.2356 US dollars. Any change in the currency value will usually be seen in the fourth figure after the dot, known as a pip. The spreads, gains, and losses will usually be presented in pips.
Pip value can be a confusing topic. A pip is a unit of measurement for currency movement and is the fourth decimal place in most currency pairs. For example, if the EUR/USD moves from 1.1015 to 1.1016, that's a one pip movement.How much of a profit or loss a pip of movement produces depends on the currency pair you are trading and the currency you opened your account with. Pip value matters because it affects risk. If you don't know what the pip value is, you can't precisely calculate the ideal position size for a trade, and you may end up risking too much or too little on a trade.
Understanding how pip values work is important, you can also play around in a demo account to check how pip movements affect your profit and loss for various pairs and lot sizes.
WHAT AFFECTS THE FOREX MARKET?
The forex market has high liquidity, due to an elevated supply and demand rate. Traders apply transactions based on financial events, as well as general events. Naturally, when a currency will be in high demand, its value will rise compared to other currencies, and vice versa.
Financial events are frequent statements by countries, central banks or other financial institutions, on topics such as unemployment rate, manufacture numbers and many more. A decrease in a country’s unemployment rate can indicate that the economy is strong, and this can lead to an increase in the value of the currency. If it’s a major announcement, it can affect other currencies as well. Before the event takes place, traders speculate on its content and open positions based on this speculation. All the events can be seen and followed on the economic calendar.
When we look at EUR/USD, it states how the USD behaves traded against EUR. If prices go up, the EUR is stronger than USD or the USD gets weaker. If prices fall, the USD is stronger than EUR or EUR is getting weaker.
If you believe the US economy will weaken, which would be bad for the USD, you would buy EUR/USD. This means you have bought Euros in the expectation they will rise in value against the US-Dollar.
On the other hand, if you think the US economy will be strong and therefore the US-Dollar will rise in value against the Euro, you would sell EUR/USD.