Foreign exchange(Forex) is the process of changing one currency into another. And this could be for a variety of reasons that's mostly commerce related. If you've begun your investing journey, The stock market is a familiar place, But if you're looking to expand or diversify your portfolio into other assets, then There's Forex.
The forex market is a global network of banks, hedge funds, brokers and individual retail traders, and their goal is to trade or exchange national currencies for another, All in an effort to make a profit.
Central banks of countries participate in the forex market and they are responsible for maintaining and stabilizing the currency value of their respective countries. Currency in all forms are important because they enable exchange and purchase of goods and services, Locally and globally.
Investors trade the forex market in pairs, for example: EUR/USD is one of the most traded pair in forex . EUR is the "Base currency", while the USD is the "Counter or Quote currency".
In the past, The market was mostly dominated by large banks and huge financial organizations, but recently, it has become more accessible for participation by individuals from anywhere, this means you can access and trade the market from any location in the world, So long you have a device connected to the internet. The forex market is the most traded or liquid market in the world with a turnover of $5.1 trillion per day. The U.S stock market trades $2.57 billion a day which is a very large figure, but its a small fraction, when compared to the forex market. Forex is traded 5 days a week and 24 hours a day. worldwide by individual traders, banks and institutions. Without any centralized marketplace.
Currencies can be grouped into 3 categories:
The Major Pairs: They involve the U.S Dollar and they are usually the most traded. they include pairs like EUR/USD, USD/CHF, GBP/USD, USD/JPY and so on.
The Minors: They are a combination of other major currencies, with exclusion of the U.S Dollars most of the time., like, EUR/GBP, GBP/JPY,AUD/NZD,
The Exotics: Examples of this pairs are AUD/SGD, CHF/SEK, GBP/MXN. They are not widely used in global financial transactions, so they have low volume, but are volatile. All currencies are given a 3 letter code, this represents the countries currency. here's some examples and what the currencies represent.
USD- United states dollar.
JPY- Japanese Yen
CAD- Canadian Dollar
AUd- Australian DOllar
CHF- Switzerland Franc...and so on
LOT: A standardized unit of a currency, and it could be Micro or Mini Lots.
PIP: Percentage in points, And it's the smallest possible price change within a currency pair.
LEVERAGE: Leverage allows traders to participate in the forex market without having the amount of money required(leverage is another word for borrow in forex lingua)
MARGIN: Think of the word "Margin" as traders putting down some funds upfront as a deposit, this is known as margin.
CURRENCY PAIR: Currencies as explained earlier are paired against each other in the forex market i.e EUR/USD.
LONG/SHORT: When you go long on a trade, or on a currency pair, The EUR/USD for instance, The Base currency(EUR) is bought, while the quote currency(USD) is sold. And vice-versa, Going long means, you expect prices to rise, If you Buy or Long the EUR/USD this means you expect prices of the Euro to rise against the Dollar, and when you Short or SELL, also vice-versa, you're expecting the price of the USD to rise against the Euro. This may seem a little confusing in the beginning but hang in there, You'll eventually understand how it works.
BULLISH/BEARISH: Basically, When the market is bullish it means prices are going up. and bearish means the market or asset price is going down.
There are different dynamics that cause spikes and movements that occur in the market just like any other market, Prices are set by the demand and supply of buyers and sellers, but there are many other factors that can influence the direction of prices, Like
- Central bank policies
- Economic growth
- Interest rates and many more
The forex market provides opportunities by giving people and organizations access to trade and invest in different currency pairs of both developed and emerging economies.
Some brokers/platforms also provide access to trade and invest in stocks, indices, commodities, futures, ETFs and more.
However, Keep in mind that while there's an upside potential for massive gains, Leverage can be a double edged sword and cause your losses to be huge too If you're not knowledgeable enough or experienced to engage in this. Trading in the FX market means you will be competing and most likely trading against other Professional traders, robots, super computers and huge financial organizations.
So you must take the time and educate yourself, read, learn and become a good trader.
The forex market can be a complicated and difficult beast to tame. But with the right education, tools and strategies you can become a professional at this and get to a point where you can trade for a living.
For more information on how to trade the forex market, The best tips and strategies to ensure consistent profits, Risk management, The best brokers/platforms and tools right now, You can send us a message here at SAMPEDIA, Our team of professional traders will guide you on trading or investing in the forex market Intelligently.