Forex Market is widely accepted as the world largest market. Why? Simple! Exchanging currencies one for another is crucial for businesses and trading worldwide.
The Forex market allows two currencies to be exchanged at an exchange rate, which might be floating or fixed. This is a system where businesses and people complete transactions across currencies. Currencies should be exchanged in order to have the international transactions completed. If a beer merchant in England wants to purchase beer from Germany, he needs to exchange their pound sterling (GBP) for euros (EUR). Exchanging currencies is the fundamental market for all international trades. Forex is a decentralized market, which means that there is no central trading area. A large number of transactions are executed by banks on behalf of their clients.
How did Forex start?
Everything started in 1875 with the old standard monetary system. Before using the nowadays system of fiat currencies, gold and silver were used to exchange services and goods. There was a problem with gold since its value changed depending on the supply. If a new asset was discovered, the value of gold used to decrease. Eventually, different countries started to hold an amount of their currency to ounces of gold. After First World War, this system broke down and currencies were no longer stored to gold.
How does currency trading work?
The well-known forex market is all about exchanging currencies between two parties at pairs at an agreed price. Who can be a trader? Well, everyone! They might be financial institutions, international corporations, central and commercial banks, money changers, insurance companies, individual speculators and individual traders.
Currency trading is always done in pairs. The pair consists of a base and a quoted currency. The famous pair EUR/USD consists of EUR, which represents the base currency and USD the quoted one. If the exchange rate of EUR/USD is at 1.1630 means that to have 1 euro, you need the equivalent of 1.1630 in US dollars.
The user-friendly trading platforms and the 24/5 availability make forex market an appealing market to invest your capital. The best attribute of this market is its high level of liquidity, which means they can trade any volume they want, and they are not likely to experience price manipulation.
More attributes of Forex are a $5 trillion daily turnover, leverage availability and education seasons provided by brokers, all this make it attractive to many traders across the world.
CATEGORIES OF CURRENCY PAIRS
EUR = The first currency is named the Base Currency
USD = The second currency is named the Quote Currency
Major Currency Pairs
Major currency pairs are named this way since they
contain the US Dollar and are the most traded FX pairs.
EUR/USD Euro/US Dollar
USD/JPY US Dollar/Japanese yen
GBP/USD British pound/US Dollar
USD/CHF US Dollar/Swiss franc
USD/CAD US Dollar/Canadian Dollar
AUD/USD Australian Dollar/US Dollar
NZD/USD New Zealand Dollar/US Dollar
Exotic currency pairs
Currencies from developing economies coming in pair
with a major currency.
EUR/TRY Euro/Turkish Lira
USD/TRY US Dollar/Turkish Lira
USD/SEK US Dollar/Swedish Krona
USD/NOK US Dollar/Norwegian Krone
USD/DKK US Dollar/Danish Krone
USD/ZAR US Dollar/South African Rand
USD/HKD US Dollar/Hong Kong Dollar
USD/SGD US Dollar/Singapore Dollar
USD/THB US Dollar/Thailand Baht
USD/MXN US Dollar/Mexican Peso
Minor Currency Pairs
Minors are pairs that do not include the USD.
AUD/CHF Australian Dollar/Swiss Franc
AUD/JPY Australian Dollar/Japanese Yen
CAD/CHF Canadian Dollar/Swiss Franc
CAD/JPY Canadian Dollar/Swiss Franc
CHF/JPY Swiss Franc/Japanese Yen
EUR/AUD Euro/Australian Dollar
EUR/CAD Euro/Canadian Dollar
EUR/NZD Euro/New Zealand Dollar
GBP/AUD Pound sterling/Australian Dollar
GBP/CAD Pound sterling/Canadian Dollar
GBP/CHF Pound sterling/Swiss Franc
GBP/NZD Pound sterling/New Zealand Dollar
NZD/CHF New Zealand Dollar/Swiss Franc
NZD/JPY Japanese Yen/Japanese Yen
MAIN FOREX CONCEPTS
Pip stands for “point in price” or “percentage in point” and it shows the smallest unit of price differences in the Forex market. To make it clear, if the exchange rate of EUR/USD goes from 1.534 to 1.532, it is said that the currency pair has fallen by 2 pips (0.0002).
Scalping is a trading strategy which helps traders to benefit from small price movements in the market. Scalp traders will target certain assets and hold positions for a small portion of time to take the best possible out of small market moves. Scalpers should be prepared to stay vigilant of market moves during all day long.
Leverage boosts trader’s power over market. It multiplies their ability to trade in financial market. Forex offers higher leverage compared to other markets and this is very attractive for traders. Leverage means funding accounts with small amounts and trade with higher volumes. The direct meaning of leverage concept means borrowing money in order to increase the potential returns on a trade, of course this increase chances to lose also.
The spread is the difference between the ask and bid price. Differently, the spread shows the cost of a transaction. A lower spread means a lower cost. A spread is correlated to many factors: the supply for the asset, how often the asset is traded, and the total interest showed for the asset and demand for it.
This is a technique used to cut off the risk caused by unfavorable price movements. Traders might implement this strategy in order to make their positions feel protected from risk while exchange rates change.
A swap is the act of exchanging one currency for another. Later, the two parties will receive their original currency back with a forward rate. The swap varies significantly among different financial instruments.