Forex trading, short for foreign exchange, is the decentralized global market where currencies are bought, sold, and exchanged. It is the largest financial market globally, with an average daily turnover of more than $5 trillion.
Forex trading involves buying one currency while simultaneously selling another, with the goal of profiting from fluctuations in exchange rates. This market operates 24 hours a day, five days a week, and is accessible to traders worldwide. Forex is influenced by a variety of factors, including global economic events, political developments, and market sentiment, making it a dynamic and exciting market to trade in.
Forex (FX) stands for foreign exchange
This is a decentralised marketplace where global currencies are exchanged for one another; buy and sell currencies simultaneously. The FX market is the largest market in the world with over $6.6 trillion volume traded every day. This is due to multiple market participants such as financial institutions, Hedge funds, Retail traders etc.
Global currencies are important to conduct business and for travelling amongst other things. If you travel from the United States to France, you must exchange the United States Dollars (USD) for the EUROs which is the accepted currency in Europe since France is in the Eurozone.
Effectively, you have participated in the forex market. The price of a currency is a direct reflection of the conditions of the country’s economy. The weaker/stronger the price of the currency is, the weaker/stronger the economy is.
This is determined by combining two currencies together which is referred to as a currency pair. The FX market is traded in currency pairs. E.g. EUR/USD – the means the EURO vs US DOLLAR. The difference in the exchange rate reflects the strength of one economy and the weakness of another.
Traders profit by buying the stronger currency and selling the weaker currency. Unlike holding physical money, FX trading is known as over-the-counter (OTC) trading. It is the process of trading securities via a broker amongst traders all over the world. The FX market is open 24 hours, 5 days a week.
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In a currency pair, the currency on the left is referred to as a BASE CURRENCY and the one on the right is referred to as a QUOTE CURRENCY.
The BASE CURRENCY is equivalent to 1 unit and the QUOTE CURRENCY reflects the exchange rate.
In the example above, 1 EUR costs 1.07400 USD.
A currency pair usually has two quotes; the BID and ASK price.
- ASK: The lowest price at which a trader is willing to BUY a currency.
- BID: The price at which you are willing to SELL a currency.
The FX markets can be analysed in 3 different ways, TECHNICAL, FUNDAMENTAL AND SENTIMENTAL analysis.
- TECHNICAL ANALYSIS: A study of historical market movements, common patterns and levels to identify future market trends. This type of market analysis is used by technical traders mainly to identify entry and exit points.
- FUNDAMENTAL ANALYSIS: Fundamental analysis is the study of economic indicators and social and political forces that determine the overall exchange rate of the currency. These forces can affect the exchange rate of a currency in the short-term, medium-term, and long term.
- SENTIMENTAL ANALYSIS: This type of market analysis is about opinions and the overall sentiment amongst traders. This also includes the use or study of the COT (Commitment of Traders) report.
Final thoughts on Forex
In conclusion, forex is a decentralised global market where currencies are bought, sold, and exchanged. It is the largest financial market globally, with an average daily turnover of more than $5 trillion, and offers numerous trading opportunities to investors worldwide. Forex trading involves buying one currency while simultaneously selling another, with the aim of profiting from fluctuations in exchange rates.
This market operates 24 hours a day, five days a week, and is influenced by a variety of factors, including global economic events, political developments, and market sentiment. As a trader, understanding the basics of forex is crucial to making informed trading decisions and potentially reaping significant profits. Whether you are a beginner or an experienced trader, the forex market offers exciting opportunities for anyone looking to invest in the global economy.