The foreign exchange market is gaining in popularity as more exposure of how it works spreads online. It is the world’s most traded market, turning over more than $5 trillion every day and it is openly accessible and relatively easy to start. One of the key attractions of forex is that the market operates 24 hours a day. There isn’t any one centralized place for forex – it operates in whichever market is open at the time and isn’t constrained to the normal 9-5.
Introduction to forex
Trading forex means buying a currency and selling another in order to achieve a profit through the transaction by speculating the direction a currency will take against another. The production of software and tools from forex brokers has made it much more simple to do this and begin trading. For instance, XTB online trading has easy-to-use software, trading charts and a calculator that shows performance statistics, on both mobile and PC platforms. All of which is fully customizable to help trading strategy from over 1500 global markets.
Every trader has to start somewhere and before starting it is usually advisable to find an online broker which offers lessons in the forex market, how it operates and how to manage currency pairs. By using sites like XTB, you can get an introduction to forex terminology and the foreign exchange market as a whole, because getting started in forex means understanding the language used in trading. It’s important to understand how to set up a trade and then what happens to the trade to turn it into a profit or a loss on your account.
Key forex terminology to know
Currency Pair: The value of any currency is always determined by its comparison to other currencies. A currency pair is the basic price structure between two currencies in the foreign exchange market. The first currency is called the base currency and the second is called the quote currency. This demonstrates the value of one currency against the other.
Base Currency: This is the first currency quoted in a currency pair, often the domestic currency or the US dollar.
Quote Currency: This is the second currency in a currency pair, that applies the value to the base currency.
Pip: Currencies are usually calculated to four decimal places and the pip is the smallest price change that can occur in an exchange rate, usually the movement of the last decimal point. And this is often how traders calculate their profit.
Cross Currency Pair: Because the US dollar is the most popular currency in a currency pair, any currency pairs that don’t include it are referred to as cross currency pairs. For instance
How forex trading works in action
When trading the euro (EUR) against the dollar (USD) for instance, if the current price for the euro is 1.1137 it means one EUR is worth 1.1137 USD.
If are buying EUR, it means you are predicting that it will rise in price against the dollar and that the USD will fall in value against the EUR. If the price moves to 1.1142 then it is has moved 5 pips. Depending on the size of your trade, your position will have increased by five times that pip value. Conversely, if the price of the EUR falls to 1.1132, then you will have lost 5 times the value of your pip.
Different types of currency pairs have different risks
These are the most commonly traded pairs, accounting for over 80% of foreign exchange volume. These are major currencies traded against the USD, like the EUR, Japanese yen (JPY), Pound Sterling (GBP) or Australian dollar (AUD).
These currencies are from highly managed, stable economies that experience smaller movements and with it smaller spreads. They are less volatile and have high liquidity.
Cross Currency Pairs
These are pairs that do not include the USD. So a trade between the GBP/AUD would be considered a cross currency pair. They are typically (but not always) less liquid than major pairs and can experience more volatility in price movement.
These are pairs that include currencies from either smaller or new economies, usually against a major currency. They represent a much riskier trade as they are highly illiquid, susceptible to manipulation and can be sensitive to shifts in political or financial influences.
Forex is the biggest and most accessible financial market
The need to exchange currencies for goods and services is the reason that forex is the largest (and most liquid) finance market in the world. Because there is no central place where it happens, it makes it one of the most accessible and influential financial markets for anyone taking their first steps into trading.
Because markets are open around the world, currencies can be active all day, every day. It can take time to understand what it takes to spot currency traits or identify potential positions in the market, and it pays to seek as much instruction as possible before playing the markets for real.
Also published on Medium.