What is Forex?
Forex is your way into a $6-trillion-a-day market: Experience the world of trade in a nutshell!
What are the major currency pairs?
When trading the Forex market, we are actually speculating on the relative values of two paired currencies – each currency pair delineated in a 6-letter form that joins the respective 3-letter designations of the two traded currencies (EUR-USD, for example). One – the base currency (here, the Euro) – is that which lends the pair its basic unit, the other (the US Dollar in the example above) – the counter currency – is that which lends the pair its value. Accordingly, the value of the currency pair describes the number of counter-currency units required for the exchange of a single unit of base currency. If the value of the EURUSD is quoted as 1.1046, then 1 EUR equals 1.1046 USD.
The top eight currencies in which the world’s trade is executed are the US Dollar (USD), the Euro (EUR), the Japanese Yen (JPY), the British Pound (GBP), the Canadian Dollar (CAD), the Australian Dollar (AUD) and the New Zealand Dollar (NZD). The Chinese Yuan is not mentioned here since it does not have a floating exchange rate, but rather one that is pegged to the USD and manipulated by the government.
The major currency pairs are comprised of one of the above-mentioned seven (apart from the USD) paired against the US Dollar (the latter as the base currency in 3 pairs and the counter-currency in 4). Since these represent the most often traded pairs, usually their liquidity is highest and their spread (trading cost) the lowest.
How FX trading works?
As mentioned, trading Forex involves speculating on the price evolution of currency pairs – instruments that track the relative value between any two national currencies. The value of each currency is a function of demand and supply, with the latter regulated by a nation’s central bank through printing and circulation, on the one hand. The central bank also determines the interest rates at which commercial banks can deposit or loan funds with/from the central bank. Both of these are amongst the central bank’s two primary tools for administering a nation’s monetary policy.
Thus, a central bank can also influence circuitously a country’s economy: for example, by lowering interest rates, companies can access “cheap” money to develop their activities and provide more jobs. On the other hand, by printing money, they also generate inflation, devaluating the currency and decreasing the individual’s retail facilities, thus depressing the economy. Consequently, a Forex trader would do well to be conversant with current affairs and the economic (as well as political) news.
Additionally, markets are subject to market cycles and individual behavioural cycles, which enables us to also examine them based on past behaviour. Because markets are made up of individuals, those same instincts, fears and greed that are palpable in individual people, dictate market behaviour, as well. This gives rise to technical schools of analysis that ignore the above-mentioned fundamentals in lieu of the results thereof.
Either way, to understand how trading forex works, it is not enough to open and fund an account, then blindly push buy or sell buttons. To succeed, one must understand what is moving the markets and be able to apply the knowledge to the behaviour.
How to start trading Forex?
Forex trading for beginners is simply a question of opening and funding an account, then selecting a pair and deciding whether to buy (invest in a long position) or sell (invest in a short position) a currency pair CFD. That said, it is much more complex and much more interesting.
Entering the world of forex means entering a realm that almost never stops moving, it means entering a realm where one always has to be on top of multiple factors – news events, financial data releases geopolitical happenings and almost anything that has any sort of market impact.
Gaining an understanding of these issues may be crucial to success when trading Forex and if one is able to do so – one could be successful as a Forex trader.