What is forex and how does it work? - GREAT MONETIZE

What is forex trading?

 Forex, also known as forex trading or foreign exchange trading, is the conversion of one currency into another. It is considered one of the most actively traded markets in the world, with an average daily trading volume of $5 trillion. Take a closer look at everything you need to know about forex, including the nature of forex, how it is traded and how forex leverage works.

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What is forex trading?

 Forex or foreign exchange can be defined as a network of buyers and sellers who transfer currencies among themselves at an agreed rate. This is the means by which individuals, companies and central banks convert one currency into another - if you have ever traveled abroad, you have probably made a forex transaction.

 While a lot of foreign currency is converted for practical purposes, the vast majority of currency conversions are done for profit. The amount of currencies that are converted daily can lead to significant volatility in the price movement of some currencies. This volatility is what makes the forex market attractive to traders: it brings great opportunities for great profits, and also involves increased risk.

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 How do the currency markets work?

 Unlike stocks or commodities, forex trading is not traded on exchanges, rather it is done directly between two parties in an over-the-counter (OTC) market. The forex market is managed by a global network of banks spread over four major forex trading centers in different time zones: London, New York, Sydney and Tokyo. Since there is no central location, it is possible to trade forex 24 hours a day.

 There are three different types of forex markets:

 Spot forex market: is the physical exchange of a currency pair, which takes place at the specified point of settlement of the trade - i.e. instantly - or within a short period of time

 Forex forward market: in which a contract is agreed to buy or sell a certain amount of currency at a specified price, to be settled on a specified date in the future or within a set of future dates

 Forex future market: in which a contract is agreed to buy or sell a specified amount of a certain currency at a specified price and a specified date in the future. Unlike futures contracts, futures contracts are legally binding

 Most of the traders who speculate on forex trading rates do not plan to receive the currency itself, instead they make predictions of the exchange rates in order to take advantage of price movements in the market.

 What is the base currency?

 The base currency is the first currency in the forex pair, while the second currency is called the quote currency. forex trading always involves selling one currency in order to buy another, which is why it is included in pairs - the price of a forex pair is the value of one unit of the base currency in the quote currency.

 Each currency in the pair is listed as a three-letter code, the first two letters usually representing the region, and the third for the currency itself. For example, GBP/USD is a currency pair that involves buying the British pound and selling the US dollar.

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 Base currency and quote currency

 To maintain order, most providers divide pairs into the following categories:

 major pairs. Seven currencies make up 80% of global forex trading. They include: EUR/USD, USD/JPY, GBP/USD and USD/CHF

 secondary pairs. Less traded, where major currencies are traded against each other instead of the US dollar. They include: EUR/GBP, EUR/CHF, and GBP/JPY

 Non-major or unfamiliar pairs

What moves the forex markets?

 The forex trading market is made up of currencies from all over the world, which makes it difficult to predict exchange rates as there are many factors that may contribute to price movements. However, like most financial markets, forex is affected primarily by the strength of supply and the strength of demand, and here it is important to understand the influences that lead to price fluctuations.

 central banks

 Supply is controlled by central banks, which can announce measures that will significantly affect the price of their currency. Quantitative easing, for example, involves pumping more money into the economy and may cause the price of its currency to fall.

How trading in forex

 News reports

 Commercial banks as well as other investors tend to place their capital in economies with strong prospects. Therefore, if there is positive news about a particular region in the markets, it will encourage investment and increase the demand for the currency of that region.

 Unless there is a parallel increase in the supply of a currency, the discrepancy between supply and demand will cause its price to rise. Similarly, negative news can cause investment to fall and the price of a currency to fall. For this reason, currencies tend to reflect a view of the health of the economy of the region they represent.

 Market trends

 Also, market sentiment, which is often a reaction to the news, may play a major role in increasing currency rates. If traders believe that a currency is headed in a certain direction, they will trade accordingly and may convince others to do the same, causing demand to increase or decrease.

 How does forex trading work?

 There are a variety of different ways you can trade forex, but they all work the same way by buying one currency and selling another at the same time. Traditionally, many forex transactions are conducted through a forex broker, but with the rise of online trading, you can take advantage of forex price movements using derivatives such as CFD trading.

 CFDs are leveraged products that enable you to open a position for a fraction of the total value of the trade. Unlike non-leveraged products, you do not take ownership of the asset, but rather take a position based on what you expect to see in the market value rise or fall.

 Although leverage products may multiply your profits, they may also multiply your losses if the market moves against you.

 What is the spread in forex trading?

 The spread is the difference between the bid and sell price quoted for the forex trading pair. Like many financial markets, when you open a forex position you will be shown two prices. If you want to open a long position you will trade at the buy price, which is slightly above the market price. If you want to open a short position, you will trade at the sell price - just below the market price.

What is meant by lots in forex?

 Currencies are traded as lots - batches of currency used to standardize forex trading. Since foreign currencies tend to move in small amounts, lots tend to be very large: a standard lot is 100,000 units of the base currency. Therefore, the vast majority of forex trades are leveraged because individual traders may not necessarily have 100,000 pounds (or whatever currency they are trading) to put into each trade.

 What is meant by leverage in forex?

 Leverage is a way to gain exposure to large amounts of currency without having to pay the full value of the trade up front. Alternatively, you can place a small deposit, known as a margin. When you close a leveraged position, your profit or loss will depend on the total trade volume.

Although this may magnify your profits, it may also bring the risk of amplifying losses - including losses that could exceed your margin. Therefore, trading with leverage is extremely important to know how to manage your risk.

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 What is margin in forex?

 Margin is a major part of leveraged trading. It is the term used to describe the initial deposit that you make to open and maintain a leveraged position. When you trade forex on margin, remember that your margin requirements will change depending on your broker, and the size of your trade.

 Margin is often expressed as a percentage of the full position. So, trading on EUR/GBP, for example, may require paying only 2% of the total value of the position to be opened. So instead of depositing £100,000, you will need to deposit only £200.

 What is a pip in forex?

 Pips are the units used to measure movement in a forex pair. A forex pip usually represents the movement of one digit in the fourth decimal place of a currency pair. If the GBP/USD moves from $1.5361 to $1.5371, then it has moved by 1 pip. Other decimal places that appear in the price after the pip are known as fractional pips.