What is Forex? Introduction For Beginners

Intrigued to learn more about Forex trading? Well, if you’ve ever traveled to another country, the chances are you have visited a currency exchange booth and exchanged your money into the currency of the country you were visiting. In this case, it’s very likely that you noticed a screen displaying different exchange rates for different currencies. This is known as currency trading or forex trading.

For the sake of this article, I will assume you made it to the counter and exchanged $500 into Japanese Yen. That’s 50,000 Yen! Bet you thought you were rich…

When you exchanged your money, you essentially participated in the Forex market! You’ve exchanged currencies. Or in Forex trading terms, by trading the USD/JPY currency pair you’ve sold Dollars and bought Yen. Then on your way back home, you stopped by the currency exchange booth again to exchange 500 Yen that you somehow had left over (Japan is expensive!) and you noticed the exchange rates had changed whilst you were away.

First, Why Should You Trade Forex?

So, why trade forex? Taking the example above – the currency exchange booth gave you $6 rather than $5 and you could now afford the super delicious sushi from the van man along the road!  Well, it’s these changes in currency pairs exchange rates that help traders to make money in the foreign exchange market.

Now, let’s think about this on a bigger scale. Forget sushi and think of $2,000,000 software instead. A large international company may need to pay for new software in a different currency. The exchange rate fluctuates continuously so these few pennies (or pip value in forex jargon) here and there add up very quickly. This means that your losses can end up being huge, but it also means your profits can be huge (“huge” in Trumpglish).

This is the main reason why individual traders and organizations are engaged in Foreign Exchange trading. Some entities need to hedge their exposure to a certain currency while others speculate that the value of one currency will appreciate or depreciate against the counter currency. In other words, traders and market participants are trying to predict currency pairs’ price movements and use these minor changes in currency prices to make significant profits.

To start trading forex, you need to open a forex trading account with one of the reputable online forex brokers in the market. A forex broker gives you access to the forex markets and enables you to place orders and execute your trades on a trading platform.

Bear in mind that many online forex brokers provide a demo account so you can get familiar with the platform and understand how the forex market works before you risk real money. Usually, this is the first step of your forex trading journey – opening a demonstration practice account.

Introduction to Forex: What is Forex and How Does the Forex Market Work?

Forex market is short for ‘foreign exchange market’ (sometimes abbreviated to just FX market) and is the most liquid and largest market in the world with an average daily trading volume exceeding $6 trillion.

That’s trillion with a “t”!

All the world’s combined stock markets don’t even come close to the total turnover of the Foreign Exchange markets. And unlike the stocks and commodities market, Forex is a decentralized market and currency pairs are traded worldwide. This means that there is no central location and there are no formal exchanges where transactions take place.

average daily trading volume in forex

What’s more? Forex is a market that rarely closes! The currency markets are open 24 hours a day and 5 days a week, only closing down during the weekend (sleep is not for traders, right?). So unlike the stock or bond markets, the Forex market does NOT close at the end of each business day. Instead, forex trading just shifts to different major financial centers around the world and forex trades can be executed 24 hours a day.

So, how does it work? The Forex market can be broken up into four major trading sessions. The Sydney session, the Tokyo session, the London session, and Trump’s favorite time to tweet, the New York session. Some forex brokers and traders prefer to differentiate sessions by names of the continent. This is known as the ‘Forex 3-session system’. These sessions consist of the Asian, European, and North American sessions.

currency map in forex

In terms of the specifics, the Forex market opens in New Zealand on Monday morning, which is called the Sydney session. Makes no sense but we don’t make the rules. It is open every day throughout the week until it closes on Friday at 5 pm EST. Other than the weekends, there are just two public holidays when the entire Forex market is closed, Christmas and New Year’s Day.

How Does Forex Trading Work?

To trade Forex is to essentially buy and sell currencies – with the aim of making a profit. When trading forex, traders use various trading strategies in order to analyze two currencies trading one against the other. A forex trading strategy can be broken down into fundamental and technical analyses.

Fundamental analysis can be described as a trading technique when a trader evaluates the value of an asset-based on fundamental factors such as changes in interest rates, GDP and employment rates, political issues, etc. Technical analysis, on the other hand, is a trading discipline that helps investors to predict price movement by using the past performance of the asset and technical indicators on a trading chart.

For instance, if you are trading a currency pair like the EUR/USD, you will be aware of the interest rate differential between the US and the Eurozone. Also, you should also follow market news that might affect the future performance of your chosen currency pair. But eventually, most traders analyze currency pairs using a candlestick chart and technical analysis indicators. 

Keep in mind that, unlike many other financial markets, Forex traders can make money on the up when things are going well in the forex world and also on the down, when things aren’t going so well… This means you can trade forex pairs in both directions as online brokers enable users to utilize leveraged trading and to be able to buy and short sell a certain currency pair.

By now, you understand forex trading basics. But you can learn about the forex market and forex trading in the next chapters.

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