What is Forex Trading?

Want to find out about Forex? You’re in the right place. In this article, we will cover all the basic information you need to know about forex trading and the forex market. Read on to find out more.

What is Forex?

Forex stands for Foreign Exchange and is the buying and selling (exchanging) of currencies The goal with forex trading is to make a profit from the change in currency value.

You might have already tried exchanging buying and selling currencies before, for example, when going on holiday. And you might have already noticed that you can buy and sell currencies at different prices. For example, when you exchanged money at the bank before your trip, you might have noticed that different banks offered different rates. And you might have also seen, when you got back from your trip, that the price for buying and selling currencies had changed. This is because market prices fluctuate.

Exchange rates are changing all the time. Your bank will normally have one set rate for the day and that is the rate you get when you buy and sell currencies with your bank. The difference is, when trading forex with a forex broker, that you can access the forex market any time during the week, and you can trade whenever you think the price is right. As such, trading on the Forex market with a broker gives you more flexibility and more opportunity to profit from the change in prices.

The Forex Market

The foreign exchange market is the largest financial market in the world, with an average of $6 trillion transactions being made daily. These transactions are done through a network of banks, brokers, forex traders, and financial institutions. This is because the forex market lacks a central exchange. The advantage of this, however, is that the forex market is that is open 24 hours a day for 5 days a week.

Currency Pairs Explained

In Forex, two currencies must be involved. The reason being is that the change in values is compared between the two currencies. For example, if you believe the Euro is strengthening against the US dollar, you set a buy trade. If you believe the Euro is weakening against the US dollar, you initiate a sell trade.

In a currency pair, there is the base currency and the quote currency. The base currency is the first currency listed while the quote currency is the second and is used to make a transaction. For example, USD/JPY is at 112.50. USD and JPY represent the base and quote currency respectively. This shows that for one unit of USD, you get 112.50 JPY.

Currency Codes

Currency codes show how different currencies can be identified. The first two letters show the country name while the last letter shows the currency’s name. For example, the USD is the United States Dollar, and the JPY is the Japanese Yen. 

Types of Forex Pairs

There are three types of Forex pairs. These are major pairs, minor pairs, and exotic pairs.

Major pairs. These are the most traded and always include the US dollar. They are EUR/USD, GBP/USD, USD/CAD, USD/JPY, USD/CHF, AUD/USD, and NZD/USD.

Minor pairs: These are pairs that do not involve the US dollar. They include GBP/JPY, EUR/JPY, EUR/GBP, AUD/JPY, and CAD/CHF among many others.

Exotic pairs: These are currency pairs where a major currency is paired with an emerging currency. For example, USD/TRY, GBP/NOK, USD/MXN among others.

Basic Forex Terms

Bid and ask price: The bid price is the price at which you sell a currency while the ask price is the price at which you buy a currency. This is what brokers charge to open your trading position.

Long and short position: This is buying and selling respectively. This is the change in the value of a currency either in the fourth decimal place or second decimal place in the case of JPY. For example, EUR/USD changes from 1.1630 to 1.1635. That is a movement by 5pips. GBP/JPY from 148.50 to 148.40 which is a movement by 10 pips.

Bullish markets and bearish markets: This represents a rise and drop in the market respectively.

Final Thoughts

In the past, banks, hedge funds, and other large financial institutions were the only ones participating in the forex market. But with the advent of retail Forex trading, many other people now have the opportunity to participate in the markets as well. Remember, Forex, as with all trading, has its risks. Learn about the markets and exactly what is Forex before investing in anything. Making well informed decisions beforehand can minimise loss and maximise profit.

To learn more, go back to our Forex Education section here.

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