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What is Forex trading and Forex market?


Forex Trading- also known as the foreign exchange market (FX) is a "place", where the currencies are exchanged.

 These currencies are traded, because people need to exchange currencies to conduct foreign trades or business. For example if you are living in the U.S. and you want to buy a chocolate from the Switzerland, you have to buy this product in euros, so it means that exchange from US dollar(USD)  to euros(EUR) is needed. The Forex market is traded between 10pm on Sunday and 10pm on Friday. Within this time frame it's active 24 hours every day, 5 days a week.


 The necessity or need of people to exchange currencies, because of globalisation and other aspects, is the primary reason, why the Forex market is one of the biggest markets in the world. The BIS(the Bank for International Settlements) concluded, that Forex market has a value of astonishing 4.9 trillion US dollars, so there is huge potential in making money. If you would have compared FX(Forex market) with stock market, the stock market looks really tiny with estimated value of "just" 200 billion dollars. The reason, why this market differs from another markets is the OTC(over the counter) system, what means that all trades occur through so called dealer network(broker) as opposed to one centralized exchange, what is followed by bigger liquidity - this can be advantage but also a disadvantage. It means that there is no central marketplace. You can even trade from Madagascar or New Zealand via this network, it doesn't matter! But there are some major trading centers and if these are opened, there can be seen a bigger price movement on the markets(bigger liquidity). The biggest ones are: London, New York, Hong Kong, Sydney and Frankfurt.

    typical desktop computer of professional trader

 There are 3 specific markets, where you can trade Forex: spot market (the most popular), the forwards market and the futures market. But we will dig in deeper to the spot market, because it's the biggest one and is used by general public and professional traders. With the advent of electronic trading it gained a huge popularity as preferred market option among the traders, investors and
speculators. The trades are traded immediately or on the spot and the orders are settled instantly, that's the reason, why it's called spot market.

 The forwards and future markets tend to be more used by companies, which need to time their trades for specific period of time in the future (these markets don't trade currencies, but they trade in contracts represented by currency, price per unit and by a future date for price action)

The spot market 

It is the place, where currencies are bought and sold within the specific price range (according to the current price), which is determined by supply and demand. The supply and demand is affected by many aspects, like interest rates, economic of the country, perceptions and assumptions of the development, politics. When the deal is done and trader has bought or sold specific currency pair, the transaction is made. It means, that one party delivers a specific amount of  currency to the counter side and receives an estimated amount of another currency by the counter site at the agreed-upon exchange rate value.

     a winning trade, where the trader made a profit because of increase in value of euro
How can you make money on Forex market? 

You can trade based on what value of currency pair is (or where it will head - speculations).  If the market will increase in its value, you should buy and if it will decrease, you should sell.  In this point it's crucial to know technical and fundamental analysis, which are the  key to master this market.  With exchange in currencies this large, it's common that analysis differ a lot. It's not difficult to find someone, who sells while you are buying.  One of the basic rules is not to be deceived by crowd that you are wrong and your strategy doesn't  work, but  to trade your own plan and stick to your strategy.

The concept of trading is that you are effectively borrowing the first currency in the pair to buy or sell(to long or short) the second currency. So you are betting that the value of of one currency will increase relative to the other. The trades are executed through the broker, who provides opened door for interested individual. You can trade for l00$, 200 times so big sum of money, without any problem. This concept wouldn't be effective without leverage, which is provided by broker or more precisely by bank. The leverage is the reason, why you can make so much money trading Forex. If you are for example trading with 200:1 leverage you can trade 200$, setting aside just 1$ in margin(margin covers your losses, you can imagine it as an insurance). The other 199$ will be covered by bank. If the leverage wouldn't exist, ordinary people or traders wouldn't be able to trade Forex effectively, because the Forex market doesn't change a lot in reality and profits would be much smaller. 

Tip

Beware that the leverage doesn't just increase your profit, but also your losses, so I would recommend beginners to use smaller leverage(for example 50:1). This gives you much less exposure, while keeping your capital investment down until you feel comfortable trading with higher leverage.

 Why and who trades Forex?

 The point of doing Forex is making money or exchanging currencies in terms of doing business or transacting money to foreign countries . This market allows a flow of the majority of commercial Forex transactions and large amounts of speculative trading every day, in which the underlying instrument is currency . There are many players in this market:

  • The companies is traded mainly by companies, which need to pay for goods and services from foreign countries. The German firm has to pay for example for solar panels in America and it has to exchange money for USD(American dollar. They are not trying to make money on forex through speculations, but they perceive it as service to conduct forex transaction in importing and exporting
  • The banks
    which can control the money supply, inflation or interest rates. Any action made by central bank is done to stabilize or increase the competitiveness by increasing or decreasing the value of their own national currencies. That's the reason why the policies of central banks can influence market in large extent. 
  • The Hege funds make up the second-biggest collection of players in Forex market. They execute speculative currency trades with intention to make big money, because they trade with large accounts such as pension funds or endowments.
  • The volume made by
    Example individual traders and investors
         is extremely low compared to that of other financial institutions, but is very popular among the ordinary people. They also execute speculative trades as for example hedge funds, but with smaller amount of money, based on their technical analysis(support and resistance, elliott waves, advanced patterns) and fundamentals(interest rate,  conditions, inflation or monetary policy expectations. They are accessing markets through brokers or dealers and are  trying to make as big profit as possible.

Note!

Never dismiss the risks involved on the Forex market! You can't think just about endless wins. The common misconception of great majority of people is, that you assume that you will just win and think about possible rewards. Instead you have to accept reality by understanding possible risks involved!



Is Forex trading for me? 

Forex trading works 24 hours, 5 days in week, so it's ideal for investors who want to trade all day long from comfort of their home not bounded by any time schedule while at the same time minimizing trading costs. However the trading can be very risky and is not suitable for everyone. You should practice at first and try it out on demo account, before depositing your own money!

Note! 

Trading at consistent and successful level is all about mindset and emotions. Trading is about having a right profitable strategy, which is proven and handling your emotions. In reality trading is 80% mental/emotional and harsh reality is that only 5-10 % are able to handle their emotions and have a correct mindset.

Basics of reading the currency pairs 

Also known as quoting currency pairs, it represents the relation between two specific currencies and reflects a mutual value between them. As an example if we would have GBP/USD pair, the forex quote would look something like this: 

GBP/USD = 0.7183

That means, that for every 1 USD you can get 0.7183 pounds.

Another thing, which should have been mentioned is the indirect and direct currency quote. A direct quote would be GBP/USD, while an indirect would be USD/GBP. If we would like to calculate the indirect currency pair, it will be in reverse (1/0.7183 = 1.3921), so USD/GBP = 1.3921. The USD is mostly used as the basic currency and stands as the first one in the pair. The exceptions are mainly the "queen"currencies like GBP, AUD(Australian dollar) and NZD(New Zealand dollars).

 Major currency pairs and cross currency pairs 

If the dollar stands in the currency pair(doesn't matter if the first or the second one), the pair is regarded as major. If dollar is not located in the pair, we refer to this type of currencies as cross currency pairs - the most common ones are EUR/GPB, EUR/JPY,  AUD/NZD and EUR/CHF.

Exotic pairs 

These are lesser traded and known currency pairs, which represent the currencies of smaller economies. But I would highly recommend the beginners not to invest in these currencies, because they are highly risky, uncertain and demand higher transaction costs known as commission than major pairs. The most common ones are USD/NOK(Norwegian crown), USD/SEK(Swedish crown) and USD/TRY (Turkish Lira) 

bulls(value increases) and bears (value decreases)

Bid and ask (going short or going long)

If someone is going long( is expecting that value will increase - bull market), the ask price is referred as the amount of quoted currency needed to be paid in order to buy one unit of the base currency( the first one).
If someone is going short(is expecting that value will decrease - bear market), the bid price is referred as the amount of quoted currency needed to be paid in order to buy one unit of the base currency( the first one).


The bid price is smaller than an ask price and differ by a few pips. See example: 

Example  GBP/USD = 0.780/90
Bid: 0.789
Ask: 0.790

Notice! The base currency is always the one in which the transaction is conducted.

The Spreads/pips

 The difference between bid and ask price is called spread. In the example above the spread is approximately 0.001 (790 - 780) or 10 pips. This article digs deeper into this topic.

    Forex isn't just a market, it's a lifestyle 






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