What is FOREX trading?
The foreign exchange market is the world’s largest and most liquidity financial market, there are more than 5 trillion US dollars traded in the foreign exchange market every day – that’s 50 times more than the New York stock exchange!
Enormous trading volumes and liquidity ensures the transparency and fairness of foreign exchange trading prices, therefore, any type of trader can buy/ sell/hold positions at any time.
The foreign exchange market is an over-the-counter market (OTC). Over the- counter trading refers to trading directly between two parties, without the supervision of an exchange. This guarantees the instant, convenient and fast features of foreign exchange trading.
Forex trading is when you buy one currency and sell another. Let us take the AUD/USD as an example: If the Australian dollar appreciates, then the buying power of the Australian dollar will increase, which means that
traders can now buy more dollars with what they have started off with, so therefore, profiting from it.
Forex trading is somewhat like stock trading. If a stock trader believes that the price of a stock will rise in the future, he/she will buy the stock and if he/she believes that the price of a stock will fall in the future, he/she will Sell this stock. If you think that the base currency in a pair is likely to strengthen against the quote currency, you can buy the pair (going long). If you think it will weaken, you can sell the pair (going short).
Forex time zones
- Tokyo open
- London open
- New York open
The most amount of trading volume goes through at the open of each of these sessions, with the biggest being the crossover between London and New York.
When it comes to trading any market, liquidity is king. One of the reasons stock market traders move to the Forex markets is due to liquidity.
Forex pairs: Majors, Minors, Crosses and Exotics
The FX majors, or major currency pairs, are the ones involving the US dollar on one side of the quote.
What are Forex crosses/FX minors?
These are the FX pairs without the USD on the base or counter currency.
What are Exotic Forex pairs?
Exotic Forex pairs are those currency pairs which are thinly traded and low in volume. But they are also pairs that can have the most volatility. As they are not as liquid, bigger traders can push them around and run stops.
Important facts about Forex trading
- All Forex trades are transacted in pairs.
- 1 pip is the smallest price the markets trade in. When the forex market on the EUR/USD moves from say 1.2300 to 1.2301, it is said to have moved 1 pip.
- FX currency rates are quoted to 5 decimal places. You will see the EUR/USD pair as quoted as 1.23101 on most FX platforms.
- The 4th decimal place is the equivalent of 1 pip. Most people refer to currency pairs going up and down by so many pips.
- A big figure is 1 full cent movement. So if the Aussie Dollar moved from 0.7800 to 0.7900 you would say it has moved 1 big figure.
- The huge trading volume of the foreign exchange market guarantees the transparency and fairness of foreign exchange prices.
- On January 15, 2015, the Swiss National Bank unpegged the Swiss France to the Euro causing mayhem and bankrupting a number of Forex brokerage firms.
- Forex trading is 24 hours a day, 5 days a week and can be traded at any time during the day and night.
- The Forex markets are one of the most highly leveraged markets in the world but regulations are coming in globally to reduce the maximum leverage amounts.
- Forex markets are decentralised. There is no one central place where all transactions occur.
Are there risks involved in the Forex market?
Yes! As with any financial instrument, risks are involved! However, the Forex market is one of the most highly leveraged markets in the world, therefore, you can trade much larger than your account size.
GMT Markets will allow you to trade up to 200 times your account size. So a $1,000 outlay can control $200,000 in total position size.
Bottom line is, you can lose much more than what you start with. As a result, you should always trade small position sizes and risk a small fraction of your overall account on any one trade. You must understand the risks involved in trading Forex before you get started.
Please note, this is just the basics of the Forex markets, consider it as an introduction to Forex trading.
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