Want to find out about Forex? You’re in the right place. In this article we will discuss Forex as well as some basic information to introduce any beginner that wants to learn from the start. Read on to find out exactly what is Forex and what’s involved when trading it.
What is Forex?
Forex stands for Foreign Exchange and is the buying and selling of currencies in order to make a profit from the changes in their value. Just like when you exchange money at the bank before a trip and want to exchange your leftover cash at the end. At that point, a change in value could mean you not getting as much as you had hoped, or more than you thought you would get. Exchange rates are changing all the time but your bank will normally have 1 set rate for the day. With Forex though, traders have acess to trade at almost any time throughout the week, and to rates that are always changing for better or worse. Forex has greater flexibility.
The Forex Market
The foreign exchange market is the largest financial market worldwide with an average of $6 trillion transactions done daily. These transactions are done through a network of banks, brokers, Forex traders, and financial institutions since the Forex market lacks a central exchange. The advantage of the Forex market is that it is open 24 hours during weekdays.
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 and 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.
They 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,
US-United States : D-Dollar = USD
JP-Japan : Y-Yen = JPY
Types of Forex Pairs
There are 3 types of Forex pairs which are major, minor, 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 do not involve the US dollar. They are GBP/JPY, EUR/JPY, EUR/GBP, AUD/JPY, CAD/CHF among 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 and Bearish. This represents a rise and drop in the market respectively.
In the past, banks, hedge funds, and other large financial institutions participated in the foreign exchange market. But with the advent of retail Forex trading, many people have been given the opportunity to participate in the markets. Remember, Forex, as with all trading has its risks. Learn about the markets and exactly what is Forex before investing anything. Making well informed decisions beforehand can minimise loss and maximise profit.
To learn more, go back to our Forex Education section here.