The foreign exchange market (called forex or FX) is the market for exchanging foreign currencies. Forex is the largest market in the world, and the traders that stand in it cover everything from the price of clothes imported from China to how much you pay for a margarita at a time. vacation in Mexico.
What is Forex trading?
At its simplest, forex trading is similar to the currency exchange you make when traveling abroad: a trader buys one currency and sells another, and the price is constantly changing. depending on supply and demand.
Coins are traded on the foreign stock market, a global market that is open 24 hours a day Monday through Friday. Over -the -counter (OTC) forex trading is used, which means there are no physical exchanges (such as the availability of funds) and a global network of banks and other financial institutions. watch the market (rather than a central exchange, such as the New York Stock Exchange.).
The majority of trading activity in the forex market is among professional traders, such as those working for banks, financial institutions and multinational corporations. These traders do not intend to physically take the money themselves; they may just be thinking about how the exchange rate will change in the future.
A forex trader can buy US dollars (and sell euros), for example, if he thinks that the currency will strengthen the property and therefore he can buy new euros. more in the future. Now, an American company with Indian operations can use the forex market as a barrier when the rupee is weak, which means the value of their earnings there falls.
How to make money
All currencies are given a three -word code as the ticker symbol of a file. Although there are more than 170 currencies in the world, the US dollar accounts for the majority of forex trading, so it is very helpful to know its code: USD. The second most popular currency in the forex market is the euro, the currency approved in 19 countries in the European Union (code: EUR).
Other major currencies, in terms of popularity, are: the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD), the Swiss franc (CHF). ) and the New Zealand currency. (NZD).
Global forex trading is described as a combination of two exchanged currencies. The next seven financial institutions — the ones known to be the largest — account for 75% of trading in the forex market:
How to say Forex trading
Each currency group represents the current exchange rate for the two currencies. Here’s how to explain that information, using EUR/USD — or the euro-to-dollar exchange rate — as an example:
- The currency in the south (the euro) is the base currency.
- The currency on the north (the US currency) is the currency.
- The purchase price indicates the amount of loan money needed to buy 1 part of the principal. As a result, the base currency is always presented as 1 part of the currency even though the type of currency is relevant to the current market and how much it takes to buy 1 part of the currency. basic money.
- If the EUR/USD exchange rate is 1.2, that is, € 1 will sell for $ 1.20 (or, to put it another way, it will sell $ 1.20 to buy € 1).
- When the purchase price rises, that is, the base price rises in value relative to the quote currency (because € 1 will sell in more US dollars) and the other, if the purchase price falls, it means that the principal has fallen to the property.
A quick note: Financial institutions are often listed with primary and secondary currency, although there is a historical debate on how some currencies are reported. For example, conversions of USD to EUR are calculated in EUR/USD, but not USD/EUR.
There are three ways to trade Forex
Most forex trading is not done for the purpose of exchanging currencies (like you would at a currency exchange in the meantime) but to think about the price movements of the currency. future, as you would do with the stock market. Like money traders, forex traders are trying to buy currencies that they expect to increase relative to other currencies or to spend money that they expect to decrease in value. purchasing power.
There are three different ways to trade forex, which attracts traders with different goals:
- The stock market. This was the first forex market where those financial institutions were exchanged and exchange rates were determined in real time, depending on supply and demand.
- The first market. Instead of executing a trade now, forex traders can enter into a fixed (independent) agreement with another trader and set a price for the amount of money agreed upon in the exchange. days to come.
- The market of the future. Likewise, traders can choose a common contract to buy or sell a pre -selected currency at a specific trading price at a later date in the future. This is done in a change rather than a personal way, as the market forwards.
Early and future markets are used by forex traders to anticipate or prevent future price changes in a currency. The trading prices in these markets are based on what is happening in the stock market, which is the largest of the forex markets and where most of the forex trading takes place.
Forex trading to know
Each market has its own language. Here are some things to know before entering forex trading:
- Cash flow. Global forex trading is about a couple of currencies. In addition to the main ones, there are some traditional trades (e.g. exotics, currencies of developing countries).
- Pip. Short for percentage in numbers, a pip is a small amount that can convert a price into a currency pair. Because forex prices are calculated to four decimal places, the pip is equal to 0.0001.
- Laha noi noi. As with other assets (e.g. prices), purchase prices are determined by how much the buyer is willing to pay for the investment (the bid) and how little the buyer is willing to buy. aku (request). The difference between the two, and the trade -offs that will eventually take place, is the demand spread.
- Lot. Forex is traded by a large amount of money, or a common currency. The amount is 100,000, although there are micro (1,000) and small (10,000) pieces to trade.
- Leverage. Because of these large segments, some traders may not want to invest a lot of money to execute a trade. Leverage, another term for lending, allows traders to enter the forex market without the amount of money required.
- Piece. Trading with leverage is not free. Traders need to put money up front as a deposit — or something called margin.
What moves the Forex market
As with any other market, cash prices are determined by the supply and demand of customers and suppliers. However, there are other macro powers at play in this market. The demand for special funds can be influenced by interest rates, central bank policy, rapid economic growth and the political climate of the country in question.
The forex market is open 24 days a day, five days a week, giving traders in this market the opportunity to respond to news not related to the stock market until the end of the year. time later. Because so much of financial trading is about speculation or hedging, it is important for traders to be quick with the dynamics that can make money.
Problems of Forex trading
Because forex trading requires leverage and traders use limit, there are more challenges to forex trading than other types of assets. Cash prices are constantly changing, but in small quantities, that is why traders need to execute large trades (use leverage) to make money.
This leverage is good if the trader makes a winning bet because it can increase the profit. However, it can still increase the losses, more than the original amount owed. In addition, if money falls sharply in value, users open themselves up to margin calls, which can force them to sell their purchases with loans at a loss. In addition to the losses, trade costs can be added or eat up a good deal.
Above all, you need to remember that other investors are small fish in the fishpond of skilled and professional traders — and there may be deception or knowledge that confuses things. new trade.
It is probably a good thing that forex trading is not always common between single investors. In fact, the stock market (but traded by non -professionals) accounts for only 5.5% of the global market, figures from DailyForex show, and none of the major online brokers offer forex trading. What’s more, the smaller traders who engage in forex trading, the more they struggle to convert an asset with forex. CompareForexBrokers found that, on average, 71% of FX brokers lose money. This makes forex trading a strategy that is often left to professionals.