Thanks to the Internet, thousands of individual traders all over the world are discovering possibilities, excitement, and challenges of online trading in the Forex market. Yet in contrast to the stock market, the Forex market somehow remains more elusive and seemingly complicated to newcomers. This article will help you to revise the complex Forex market mechanics in simple terms and make you feel familiar with the basic concepts.
Forex (FX) is the foreign exchange market where currencies are traded. For example, you transfer your local currency to another one for an upcoming holiday abroad. This is called a transaction. Just imagine, every day over $5 billion USD is whirling in the market, traded by governments, banks, corporations, and speculators.
You may ask, why learning the market structure if it is all too far from your everyday life? You will be surprised: once you start trading, you are a market participant, too and also affect it. Of course, the impact is measured by the money investment amount. Billion-dollar hedge funds and investment banks affect the market much more intensively than private traders with a few thousand dollars in action.
Currencies are traded as pairs, and the movement of currency pairs measures the value of one currency against another. For instance, the EUR/USD currency pair measures the value of the Euro against the US dollar. When the value of the pair increases, this means the value of the EUR has increased against the value of the USD. When the value of the pair decreases, this means the value of the EURO has fallen. These are the changes in the Forex market that traders usually make a profit of.
Among trading instruments, like commodities, CFDs and other, which will be illuminated in the next parts of the guide, there are currency pairs - the most popular Foreign Exchange instruments. Look up to these charts to learn the types of currency pairs:
While paying much attention to the major currency pairs, as many newcomers do, don't forget to study exotic and minor FX pairs, as well as CFD's on stocks, commodities, energy futures, and indices. Some indices can even form groups to trade. Some caution won't do any harm but don't limit yourself to just one instrument. Discover the diversity of opportunities in trading and study more about other instruments for successful trading.
First of all, what is a quote? The quote is a price offered by a market-maker for the sale or purchase of a stock or other security. If EUR/USD quote is given as 1.15, for example, it means that one Euro is the equivalent of 1.15 U.S. dollars.
In Forex trading, both 'Bid' and 'Ask' prices are quoted. The bid is a price for buying the currency and the ask is a price for selling it. Traders usually expect an increase or decrease in value and make a profit on the difference. In upcoming articles in this section, we are going to learn more about understanding and reading Forex quotes.
As you know now, profit can be made on the difference between the bid and ask price in currency pairs. Essentially, you may like to know, how much can you expect any currency to move? It depends on how much currency is being bought and sold at one time. That's called liquidity.
Cash is considered to be the standard for liquidity because it easily and quickly converts into other assets. Imagine, you want to buy a new laptop, which costs $1000. If you have cash, you can obtain this laptop right now. But if your salary is only next week, and you can't wait anymore, you may try to sell your expensive watch and buy the laptop. Finding a buyer may take a long time, so you sell your watch at a discount at a lower price than it costs to buy the laptop sooner. The expensive watch is an example of an illiquid asset.
The most liquid currency pairs are the ones with the most supply and demand in the Forex market, and this supply and demand are generated by banks, businesses, importers and exporters, and traders. Major currency pairs tend to be the most liquid, like EUR/USD and they provide the opportunity for short-term trading.
However, there are many opportunities among minor and exotic currencies as well, particularly if you have some specialized knowledge about a certain currency.
This was the first part of the Forex Trading Ultimate Guide.
What is forex spread
What are forex CFDs
How leverage works in forex trading
A summary of essential forex terms