What is Forex Trading

Foreign Exchange is commonly referred to as FX or Forex. Put simply, it is the exchange of one currency for another one on a particular exchange price. FX trading is executed in the OTC (over the counter) market. Average turnover exceeds $5.3 trillion USD every day.

If you compare this to New York’s stock exchange, this gives you a per day turnover of about $50 billion USD. This is how it stands as one of the biggest financial markets in the world.

The primary purpose of Forex trading is the act of buying one currency while you sell another. This is done for speculation. Currency values fall and rise against each other because of a number of factors that influence these; geopolitics and economics are just two factors. The common goal of Forex traders is that they profit from such changes where the value of one currency is held against another. Here it is actively speculated which way the prices will most likely go in the future.

24 Hour Trading

The fact that you can trade any time of the day you want is one of the reasons why Forex trading is so popular. Forex markets open Sunday evening and are open through Friday night. This helps with price gapping as well which is what happens when a price skips to a higher level even though no trading took place in the middle. With 24 hour trading possibility the potential for price gapping is lowered.

Leverage

Foreign exchange is a margined product. This means that you only need to deposit a small percentage of the entire position value on a Forex trade. Here the potential for profit, loss, and initial capital outlay is higher than what traders will find in traditional trading.

Pricing

All Forex is quoted in terms of one currency compared to another. There is a Base currency and then there is Counter currency.   

For instance in GBP/USD, GBP is Base and USD is Counter. The Forex price movement is only triggered when currencies depreciate or appreciate in value. If the price of GBP/USD was to fall, this would mean that Counter currency was appreciating while the Base was depreciating.

When one trades Forex prices, it means they are buying currency pairs where they believe that the base currency would appreciate against the Counter in the pair. In the same way, traders should sell a pair if they think the Base would weaken against the Counter.

Percentage in Points

Also referred to as Pip.

Usually currency pairs are quoted with 5 decimal places, with change on the fourth decimal place, called a ‘pip’. For instance, if price of GBP/USD went  from 1.33700 to 1.33910, in financial jargon, it climbed 21 pips (91-70= 21).

Spread

The difference in bid/ask of currency pairs is called ‘spread’. For example, if GBP/USD was dealing at 1.33800/1.33808, the spread here is 0.8 pips. The exceptions to these are the JPY pairs which are quoted to two decimal places.

What Affects Prices

Some of the factors affecting Forex prices include natural disasters, currency intervention, monetary policy, and economic and political stability.  

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