What is Forex?

The global economy and our way of life depend on the act of money that exchanges hands. The world is constantly running on money and the value of money in one country is largely based on the value of money in other countries.

The Foreign Exchange Market (Forex, FX, or currency market) is a worldwide decentralized currency trading market where traders can trade one currency for another.

Foreign exchange (Forex) is a global market for trading currencies. Forex is comparable to the stock exchange market where shares of companies can be traded. Forex trading is used by investors to benefit from the change in currency values due to their exchange rates.

Forex trading is where a currency is either bought or sold for another, in order to make a profit from the value changes. Forex trades are facilitated by a forex broker and trading always consists of two currencies.

The Forex-market does not have a physical location and runs twenty-four hours a day, seven days a week, allowing traders to instantly trade based on current news and events. The Forex market is a market where half-billion-dollar trades can be performed within a couple of seconds.

The foreign exchange market is one of the most exciting, fast-moving markets in the world. The Foreign exchange market is not easy to manipulate and money can be lost in a matter of seconds.

TWO LEVELS OF THE GLOBAL FOREX MARKET

The Interbank foreign exchange market
The interbank market is the highest foreign exchange market where the world’s biggest banks exchange currencies with each other.
This type of trading can be done by banks representing large businesses. Another interbank trading can be proprietary, where they trade for themselves on their own account.
Each bank has a trading desk or currency trading office, which is in endless contact with each other, to make sure that exchange rates are globally uniform.
Minimum trade sizes are one million of the base currency traded. Therefore, exchange rates are dictated by the interbank market. The SWIFT market allows banks to transfer a foreign currency to another.
Banks trade to generate profits for their clients and for themselves. Their clients/customers include wealthy individuals, governments, large corporations, sovereign funds, and hedge funds.

The Over-the-counter (OTC) market
OTC or off-exchange trading is where trading is done directly between two counterparties, without the control or supervision of an exchange regulator.
The OTC-market is where individuals and companies can trade. OTC has become very popular due to the availability of many online trading platforms all around the world.

FOREX TRADING CURRENCIES

Only a few currencies are matched with forex. One currency has a specific value when trading for another currency. The currency value of each country is largely based on the value of the countries that regularly trade in it, or have similar economies.

Foreign exchange trading between individual banks, banks and forex brokers, and brokers and individuals, is done thousands of times every day. No single entity has the ability to influence the market, at least for a very long time. It is truly a democratic form of trade.

When trading forex, there are always two currencies involved. If an individual travels to the United States of America, that individual takes his/her euros and exchanges them to dollars. The transaction is therefore a currency exchange from a certain currency to another. The same happens with Forex trading, with the exception of attempting to profit from fluctuations in currency values.

Currencies are linked and traded in pairs. For example, the USD/CAD is the US Dollar price compared to the Canadian Dollar.

A value/price is linked with each currency pair, and that price will fluctuate around-the-clock (E.g., if it costs 1.10 CAD to buy one Euro, it means the EUR/CAD price is 1.1000).

All currencies in the world have symbols, such as “CAD” or “USD”. Any currency/symbol can be joined with a different symbol in order to form a “currency pair”. The “currency pair” will consist of a certain price, based on how much of a certain currency it will cost to purchase another.

A PIP VALUE IN DIFFERENT FOREX CURRENCY PAIRS

A pip (“point in percentage”) in the forex market is a really small measure of change in a “currency pair”.

A pip in the price of a “currency pair” is located at the 4^th decimal place. (E.g., in 1.1134 the following decimal place (4) is worth one pipe). When the price goes up to 1.1135, it is called a “one-pipe move”.

Currency pairs are regularly quoted up to 5 pips. If the price goes from 1.11340 up to 1.11345, it is called a “half pip-move”.

Pips are important since profits and losses are determined by pipe movements.

HOW ARE PROFITS MADE WITH FOREX TRADING?

The amount of money a trader makes or loses with forex trading is determined by whether the price moves in his/her favour, or not. The trader’s profit/losses are measured by how many pips/kernels the price fluctuates, as well as the pipe value and the position size.

Price charts are mostly used by forex traders in order to assist traders in determining what trades they can make. If a trader believes that the CAD/EUR will rise, then that trader will buy CAD/EUR.

The first symbol in the currency pair (E.g. “CAD”) is shown as “directional money” on the chart. If the CAD is believed to increase compared to the EUR, the direction of the price on the chart will increase. If the CAD drops, the direction of the price on the chart will drop the currency pair.

Forex prices are quoted with a bid price and an asking price. A bid price is the price at which a buyer is willing to buy, and an asking price is the price at which a seller is willing to sell.

The Forex asking price is indicated to the right of the currency quote, and the bid price is located to the left of the currency quote (E.g., if the USD/CAD currency pair is 1.1185/36, then the bid price is 1.1185).

LEVERAGE IN FOREX TRADING

A trader’s profits and losses are increased by using “leverage”. The leverage is to borrow money from a relevant forex broker to increase the available capital for trading purposes.

For example, if a trader deposits $ 1,500 into a forex broker account, and they get a 10: 1 leverage. This means that the trader can take positions up to $ 15,000.

Leverage increases profits and losses which allows traders to quickly build their capital. The downside is that when lost, the capital will erode very quickly.

FOREX BROKERS AND FOREX TRADING FEES

There are forex brokers all over the world. Since the forex market is not highly regulated in certain regions, there are many unscrupulous and illegal brokers out there.

If you are looking for a forex broker, one of the most important things to look for is regulation and longevity. Ideally, the broker should be regulated in a large market such as the US, UK, Canada, Australia, Japan or New Zealand to name a few.

Brokers with a long record are preferred over new brokers, as new brokers always emerge and many disappear just as quickly.

Also look at what you are personally looking for from a forex broker. Some merchants are more concerned about fees and trading costs, while others are more concerned with customer service. One important consideration when choosing a broker is the fees they charge.

Many brokers only charge the distribution but have no other fees. Other brokers may charge a commission, but if they do, the distribution is usually much smaller. Day traders are usually better off paying the small commission for the reduced spreads, while swing traders and long-term traders should be able to perform well with a typical broker who has a slightly larger spread but no commissions.

Commissions and distributions vary by broker.

THE MOST TRADED CURRENCIES

It is said that roughly 88% of trade occurs between the US dollar and other currencies, followed by the euro. The following is an indication of the top 10 currencies of global currency transactions:

USD (US Dollar)
EUR (Euro)
JPY (Yen)
GBP (pounds)
AUD (Australian Dollar)
CHF (Swiss Franc)
CAD (Canadian Dollar)
CNY (Chinese Yuan)
MXN (Mexican Peso)
NZD (New Zealand Dollar)

LARGE FOREX TRADERS

Banks are the largest traders in the world. Investment companies are always looking for new and profitable ways to invest. Currency trading is an excellent outlet for financial experts who have the quantitative skills to invest in complex areas.

Hedge funds and proprietary trading firms represent a smaller percentage, but their trade increases for the same reason as the banks. Pension funds and insurance companies account for another part of total turnover and corporations only contribute a small percentage.

GLOSSARY OF FOREX (FOREIGN EXCHANGE) TERMINOLOGY

Ask rate – The rate at which a financial instrument is offered (as in bid / ask spread).

Asset Allocation – Investment practices that divide funds between different markets to achieve diversification for risk management purposes and / or expected return that matches the investor’s goals.

Bar graphs – Standard bar charts are commonly used to convey price activity in an easily readable chart. A price bar can represent any time frame the user wants, from 1 minute to 1 month. The total vertical length / height of the bar represents the total trade range for the period. The Open is represented by a small bar on the left of the bar, and the close for the session is a small bar to the right of the bar.

Basic Currency – Generally, the basic currency is the currency in which an investor or issuer holds its book account.

‘Blow your account’ – to lose all your available working capital through poor monetization couples’ behaviour.

Book – In a professional trading environment, a “book” is the summary of the total positions of a merchant or desk.

Broker – An individual or firm acting as an intermediary, compiling buyers and sellers for a fee or commission. By contrast, a ‘trader’ commits capital and takes one side of a position in the hope of earning a distribution (profit) by concluding the position in a subsequent trade with another party.

Buy / Sell – In the Forex market, currencies are always priced in pairs; therefore, all trades lead to the simultaneous purchase of one currency and the sale of another. The purpose of currency trading is to buy the currency that increases in value compared to the one you sold. If you bought a currency and appreciated the price, you must sell the currency back to close the profit.

Candlestick Card – A card showing the trading range for the day, as well as the opening and closing price. If the open price is higher than the set price, the rectangle between the open and closed price is shaded. If the close price is higher than the open price, that portion of the chart is not shaded.

Choice Market – A market without distribution. All trades buying and selling take place at that one price.

Cover – The process of establishing a trade.

Cross Rates – The exchange rate between two currencies expressed as the ratio of two foreign exchange rates, both expressed in terms of a third currency.

Currency Risk – the likelihood of adverse exchange rate changes.

Day Trading – Refers to positions that open and close on the same trading day.

Deficit – A negative trade balance.

Delivery – An FX trade where both parties trade actual delivery of the currencies.

Derivative – A contract that changes in value with respect to the price movements of a related or underlying security, future, or other physical instrument.

Devaluation – The deliberate downward adjustment of the price of a currency, usually through an official announcement.

Economic Indicator – Economic indicators such as GDP, foreign investment, and the trade balance reflect the overall health of an economy and are therefore responsible for the underlying shifts in demand and supply for the currency.

Floating Exchange Rates – Floating exchange rates refer to the value of a currency as determined by supply and demand.

Flat / Square – Use Merchant jargon to describe a position that is completely reversed, e.g. You bought $ 500,000 and then sold $ 500,000, creating a neutral (flat) position.

Foreign Currency – (Forex, FX) is the simultaneous purchase of one currency while selling for another. This exchange market has more buyers and sellers and daily volume than any other in the world. In major financial institutions worldwide, the forex market is open 24 hours a day.

Futures Contract – An obligation to exchange a good or instrument at a fixed price at a future date. The primary difference between a future and a forward is that future transactions are usually traded on an Exchange-Traded Contacts (ETC), which is considered as OTC contracts. An OTC is any contract that is not traded on an exchange.

Hedge – A hedge transaction is a purchase or sale of a financial product, with the goal of eliminating loss elimination due to price fluctuations. With regard to foreign exchange transactions, this would protect one against fluctuations in the foreign exchange rate.

Inflation – An economic condition whereby prices for consumer goods rise, affecting purchasing power

Initial Margin – The initial deposit of collateral required to accept a position as a guarantee of future performance.

Leading Indicators – Statistics considered as future economic activity.

Line Cards – The Line Card connects single prices for a selected period.

Long Position – A position that appreciates as market prices increase.

Margin – The required equity that an investor must deposit to secure a position.

Margin Deposit – The margin deposit is not a down payment on a purchase of equity, so many values are in the stock markets.

On the contrary, the margin is a performance mortgage, or a good faith deposit, to insure against trading losses. The margin requirement allows traders to hold a position far greater than the account value, which allows this high leverage.

Maturity – The date for the settlement or expiration of a financial instrument.
Narrow Market – occurs when there is light trading and larger fluctuations in prices relative to volume. It is often exchanged for DIN MARKET.
Open Position – An agreement that has not yet been reversed or settled with a physical payment.
Overnight – A trade that will remain open until the next business day.
Point & Figure Cards – The Point & Figure Cards ignore Time and focus entirely on price activity.
Position – The net total possession of a given currency.
Premium – In the currency markets, describe the amount by which the forward or future price exceeds the sparkling price.
Price Transparency – Describe quotes that each participant has equal access to.
Rate – The price of one currency in terms of another, which is typically used for trading purposes.
Risk – Exposure to uncertain change, the volatility of returns significantly the likelihood of less expected returns.
Risk Management – To hedge a risk, they will use financial analysis and trading techniques.
Settlement – The process by which a transaction is entered into in the books and records of the peers to a transaction. The settlement of currency transactions may or may not involve the actual physical exchange of one currency for another.
Short Position – An investment position that benefits from a fall in the market price.
Spot Price – The current market price. Settlement of mock transactions usually takes place within two business days.
Spot (Rate) – In FX Markets, Spot refers to the cash price incorporated without interest.
Spot Trading – When you trade foreign currency, you are previously given a cash price of 2 business days.
Support Levels – A term used in technical analysis that indicates a specific price level at which a currency experiences the inability to hide. Repeated failure to move the price below the point produces a pattern that can usually be formed by a straight line. This is the opposite of Resistance Levels.
Swap – A money exchange is the simultaneous sale and purchase of the same amount of a given currency at an exchange rate.
Take-Profit – A Profitable Order (T / P) is an order used by currency traders that specifies the exact rate or number of pips from the current price point where they need to close their current position for a profit. The rate that is considered the level at which the trader wants to make a profit is sometimes called the “take-profit point”.
Technical Analysis – An attempt to predict prices by analysing market action through graph study, volume, trends, moving averages, patterns, formations, and many other technical indicators.
Trading – Purchase or sale of goods and services under countries called trade.
Trend – just the direction of the market, usually broken down into three categories…. major, intermediate, and short term trends. Three directions are also associated.
Turnover – The total monetary value of all transactions executed in a given period; volume.
Two-Way Price – When quoting both a bid and offer rate for an FX transaction.
Variation Margin – Funds a broker must request from the client to deposit the required margin.
Volatility (Full) – Some price fluctuations. The standard deviation of a price range is commonly used to measure price volatility.

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