What is Forex Trading

What is Forex Trading?

If you are wondering what is Forex Trading, then let me help you out. Forex (FX) is the marketplace where various national currencies are traded. The forex market is the largest, most liquid market in the world, with trillions of dollars changing hands every day. There is no centralized location, rather the forex market is an electronic network of banks, brokers, institutions, and individual traders (mostly trading through brokers or banks).

Many entities, from financial institutions to individual investors, have currency needs, and may also speculate on the direction of a particular pair of currencies movement. They post their orders to buy and sell currencies on the network so they can interact with other currency orders from other parties.

The forex market is open 24 hours a day, five days a week, except for holidays. Currencies may still trade on a holiday if at least the country/global market is open for business.

The forex market is a network of institutions, allowing for trading 24 hours a day, five days per week, with the exception of when all markets are closed because of a holiday.

Retail traders can open a forex account and then buy and sell currencies. A profit or loss results from the difference in price the currency pair was bought and sold at.

Forwards and futures are another way to participate in the forex market. Forwards are customizable with the currencies exchanged after expiry. Futures are not customizable and are more readily used by speculators, but the positions are often closed before expiry (to avoid settlement).

The forex market is the largest financial market in the world.

Retail traders typically don’t want to have to deliver the full amount of currency they are trading. Instead, they want to profit on price differences in currencies over time. Because of this, brokers rollover positions each day.

Try out a free demo account at the leading Forex exchange, IQ Option:

What is Forex Trading – The Market Basics

Forex Pairs and Quotes

When trading currencies, they are listed in pairs, such as USD/CAD, EUR/GBP, or USD/JPY. These represent the U.S. dollar (USD) versus the Canadian dollar (CAD), the Euro (EUR) versus the British Pound (GBP) and the USD versus the Japanese Yen (JPY).

Forex Lots

In the forex market currencies trade in lots, called micro, mini, and standard lots. A micro lot is 1000 worth of a given currency, a mini lot is 10,000, and a standard lot is 100,000. This is different than when you go to a bank and want $450 exchanged for your trip. When trading in the electronic forex market, trades take place in set blocks of currency, but you can trade as many blocks as you like. For example, you can trade seven micro lots (7,000) or three mini lots (30,000) or 75 standard lots (750,000), for example.

How Large Is the Forex?

When you are considering what is Forex trading, you show be aware that the forex market is unique for several reasons. This mainly because of its size. Trading volume is generally very large. As an example, trading in foreign exchange markets averaged $6.6 trillion per day in April 2019, according to the Bank for International Settlements.

The largest foreign exchange markets are located in major global financial centers like London, New York, Singapore, Tokyo, Frankfurt, Hong Kong, and Sydney.

How to Trade in the Forex

The forex market is open 24 hours a day, five days a week across major financial centres across the globe. This means that you can buy or sell currencies and trade in the forex at any time during the week.

From a historical standpoint, foreign exchange trading was largely limited to governments, large companies, and hedge funds. But in today’s world, trading currencies is as easy as a click of a mouse. Accessibility is not an issue, which means anyone can do it. Many investment firms, banks, and retail forex brokers offer the chance for individuals to open accounts and to trade currencies.

When trading in the forex market, you’re buying or selling the currency of a particular country, relative to another currency. But there’s no physical exchange of money from one party to another. That’s what happens at a foreign exchange kiosk—think of a tourist visiting Times Square in New York City from Japan. He may be converting his physical yen to actual U.S. dollar cash (and may be charged a commission fee to do so) so he can spend his money while he’s traveling.

what is Forex Trading
What is Forex Trading

In the world of electronic markets, traders are usually taking a position in a specific currency, with the hope that there will be some upward movement and strength in the currency they’re buying (or weakness if they’re selling) so they can make a profit.

If you sell a currency, you are buying another, and if you buy a currency you are selling another. In the electronic trading world, a profit is made on the difference between your transaction prices.

What Is Forex Pips

If you have been wondering exactly what is Forex pips, this should explain it. Pip is an acronym for “percentage in point”. A pip is the smallest price move that an exchange rate can make based on forex market convention. Most currency pairs are priced out to four decimal places and the pip change is the last (fourth) decimal point. A pip is thus equivalent to 1/100 of 1% or one basis point.

For example, the smallest move the USD/CAD currency pair can make is $0.0001 or one basis point.

What is Forex Pips used for?

A pip is a basic concept of foreign exchange (forex). Forex pairs are used to disseminate exchange quotes through bid and ask quotes that are accurate to four decimal places. In simpler terms, forex traders buy or sell a currency whose value is expressed in relationship to another currency.

A pip is a basic concept of foreign exchange (forex). Forex pairs are used to disseminate exchange quotes through bid and ask quotes that are accurate to four decimal places. In simpler terms, forex traders buy or sell a currency whose value is expressed in relationship to another currency.

Movement in the exchange rate is measured by pips. Since most currency pairs are quoted to a maximum of four decimal places, the smallest change for these pairs is 1 pip. The value of a pip can be calculated by dividing 1/10,000 or 0.0001 by the exchange rate.

Check out IQ Option at the link below and trade whatever you like:

What is Forex Pips and Profitability

The movement of a currency pair determines whether a trader made a profit or loss from his or her positions at the end of the day. A trader who buys the EUR/USD will profit if the Euro increases in value relative to the US Dollar. If the trader bought the Euro for 1.1835 and exited the trade at 1.1901, he or she would make 1.1901 – 1.1835 = 66 pips on the trade.

Now, let’s consider a trader who buys the Japanese Yen by selling USD/JPY at 112.06. The trader loses 3 pips on the trade if closed at 112.09 but profits by 5 pips if the position is closed at 112.01.

Spot Transactions

A spot market deal is for immediate delivery, which is defined as two business days for most currency pairs. The major exception is the purchase or sale of USD/CAD, which is settled in one business day. The business day calculation excludes Saturdays, Sundays, and legal holidays in either currency of the traded pair. During the Christmas and Easter season, some spot trades can take as long as six days to settle. Funds are exchanged on the settlement date, not the transaction date.

The U.S. dollar is the most actively traded currency. The euro is the most actively traded counter currency, followed by the Japanese yen, British pound and Swiss franc.

Market moves are driven by a combination of speculation, economic strength and growth, and interest rate differentials.

Forex (FX) Futures

A forex or currency futures contract is an agreement between two parties to deliver a set amount of currency at a set date, called the expiry, in the future. Futures contracts are traded on an exchange for set values of currency and with set expiry dates. Unlike a forward, the terms of a futures contract are non-negotiable. A profit is made on the difference between the prices the contract was bought and sold at. Most speculators don’t hold futures contracts until expiration, as that would require they deliver/settle the currency the contract represents. Instead, speculators buy and sell the contracts prior to expiration, realizing their profits or losses on their transactions.

Forex Market Differences

There are some major differences between the forex and other markets.

Full Access

There’s no cut-off as to when you can and cannot trade. Because the market is open 24 hours a day, you can trade at any time of day. The exception is weekends, or when no global financial centre is open due to a holiday.

Get involved and try a free demo now:

Leverage

The forex market allows for leverage up to 50:1 in the U.S. and even higher in some parts of the world. That means a trader can open an account for $1,000 and buy or sell as much as $50,000 in currency, for example. Leverage is a double-edged sword; it magnifies both profits and losses.

Example of Forex Transactions

Assume a trader believes that the EUR will appreciate against the USD. Another way of thinking of it is that the USD will fall relative to the EUR.

They buy the EUR/USD at 1.2500 and purchase $5,000 worth of currency. Later that day the price has increased to 1.2550. The trader is up $25 (5000 * 0.0050). If the price dropped to 1.2430, the trader would be losing $35 (5000 * 0.0070).

Currency prices are constantly moving, so the trader may decide to hold the position overnight. The broker will rollover the position, resulting in a credit or debit based on the interest rate differential between the Eurozone and the U.S. If the Eurozone has an interest rate of 4% and the U.S. has an interest rate of 3%, the trader owns the higher interest rate currency because they bought EUR. Therefore, at rollover, the trader should receive a small credit. If the EUR interest rate was lower than the USD rate then the trader would be debited at rollover.

Rollover can affect a trading decision, especially if the trade could be held for the long term. Large differences in interest rates can result in significant credits or debits each day, which can greatly enhance or erode the profits (or increase or reduce losses) of the trade.

Making a profit of $25 quite quickly considering the trader only needs $500 or $250 in the capital (or even less if using more leverage), shows the power of leverage. The flip side is that if this trader only had $250 in their account and the trade went against them they could lose their capital quickly.

It is recommended traders manage their position size and control their risk so that no single trade results in a large loss

What is Forex Margin

Forex margin rates are usually expressed as a percentage, with forex margin requirements typically starting at around 3.3% in the UK for major foreign exchange currency pairs.

Margin is the amount of money that a trader needs to put forward in order to open a trade. When trading forex on margin, you only need to pay a percentage of the full value of the position to open a trade.

When considering what is Forex Margin, it is one of the most important concepts to understand when it comes to leveraged forex trading. Margin is not a transaction cost.

Margin is a percentage of the full value of a trading position that you are required to put forward in order to open your trade. Trading on margin enables traders to increase their exposure to the market. This means both profits and losses are amplified.

IQ Option, a regulated broker, try it now:

Trading forex on margin enables traders to increase their position size. Margin allows traders to open leveraged trading positions, giving them more exposure to the markets with a smaller initial capital outlay. Remember, Forex margin can be a double-edged sword as it magnifies both profits and losses, as these are based on the full value of the trade, not just the amount required to open it.

Having a good understanding of what is forex margin is very important when starting out in the leveraged foreign exchange market. It’s important to understand that trading on margin can result in larger profits, but also larger losses, therefore increasing the risk. Traders should also familiarise themselves with other related terms, such as ‘margin level’ and ‘margin call’.

Found what you are looking for? Hopefully you found this information has helped you answer the question what is Forex trading. If you want to know more about another type of trading, check out the information on CFD trading here.