What is Forex?

Forex is foreign exchange, otherwise known as currency. When trading forex, one currency in a pair is bought and the other currency in the pair is sold.

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Forex is foreign exchange a.k.a. currency. Forex is always traded in pairs. It involves the exchange of one national currency for another. In other words, one currency in the pair is bought while the other currency in the pair is sold. The forex market is the world’s largest market by a long margin – it eclipses the value of stocks, commodities, indices, and crypto trading. Statistics from the Bank for International Settlements (BIS) revealed a daily trading volume of $6.6 trillion in 2019, with a total market value approaching $2.5 quadrillion.

Today, we’re going to introduce you to the exciting world of forex trading. Buckle up for an introductory guide to major currency pairs, how forex trading works, and getting started as a new trader.

Major Currency Pairs

All forex is traded in pairs. This speculative activity involves the relative values of two currencies in a specific pair. Each country around the world has its currency. As a trader, you can easily identify the currency by the three-letter acronym assigned to it. The first two letters at the start of the ISO – 4217 (International Organisation for Standardization) code indicate the country, and the third letter represents the currency. Consider the following countries and currencies:

  • Europe – EUR (euro)
  • USA – USD (US dollar)
  • Japan – JPY (Japanese yen)
  • Switzerland – CHF (Swiss franc)
  • Australia – AUD (Australian dollar)
  • Great Britain – GBP (British pound)

When referring to currency pairs, there are 6-letter combinations such as USD/AUD, GBP/USD, EUR/USD, AUD/NZD, USD/JPY, et cetera. The first currency in the pair is referred to as the base currency. The second currency in the pair is referred to as the quote currency. Take the EUR/USD pair as an example. If the current exchange rate for this forex pair is 1.13, this means that €1 is the equivalent of US$1.13. Put differently, it indicates how much 1 unit of the base currency is worth in the quote currency.

The most heavily traded currencies in the world include the following currencies:

  • The Euro – EUR
  • The US Dollar – USD
  • The Japanese Yen – JPY
  • The British Pound – GBP
  • The Canadian Dollar – CAD
  • The Australian Dollar – AUD
  • The New Zealand Dollar – NZD

The Chinese Yuan – CNY, renminbi – is artificially pegged (fixed) to the value of the US dollar, and subject to Chinese government manipulation. All the forex majors include the USD as one of the currencies – either quote or counter currency – in addition to either EUR, JPY, GBP, CAD, AUD, or NZD. The USD can assume the role of base currency or quote currency in the majors. The FX majors make up the lion’s share of all forex trading activity in the world. They are extremely liquid, with low spreads.

How Does Forex Trading Work?

Forex trading is about speculating on the relative prices of currencies in a pair. Most countries have their currency, although some use the world’s reserve currency – the USD – as their preferred currency. Currency values are derived from demand and supply considerations. The central banks of countries are tasked with regulating the supply of currency. The central bank can increase or decrease supply based on policies. It can print more money, and it can reduce the amount of money in circulation by changing interest rates. Higher interest rates tend to remove money from circulation by causing investors to deposit with financial institutions. Low-interest rates tend to increase the money supply by making money more cheaply available.

The interest rate directly affects the relationship between commercial banks and the central bank. It impacts the debits and credits between the two financial institutions. The central bank is tasked with several important macroeconomic functions, notably providing financial services, regulating banks, and conducting monetary policy. It achieves these objectives by targeting a healthy inflation rate and encouraging GDP growth. Central banks have a big role to play in a country’s economy. They can implement quantitative easing (making money more cheaply available through lowered interest rates), or quantitative tightening (raising interest rates to curb inflation). When central banks print more money or lower rates, they encourage spending. This increases inflationary pressures too.

When currencies are subject to low-interest rates, they tend to devalue relative to other currencies. When interest rates are low, SMBs can easily access affordable money for expanding operations, hiring more workers, and investing in new technologies. By the same token, easy access to cheap money has an inflationary effect on the economy. This makes the currency relatively weaker and less desirable than other currencies. This has a contractionary effect on economic growth by increasing import prices and increasing exports. It’s always a good idea to stay abreast of the latest developments in the macroeconomic arena as a forex trader.

The cyclical nature of market activity should also be factored into the equation. Markets may have distinct behavioral cycles too. This allows us to analyze, hypothesize, and deduce important information regarding past behavior. The preferences, behavior, fears, and characteristics of individuals also affect market activity. Consequently, we get to examine markets based on technical analysis. The complex interrelationships between macroeconomic variables make for a fascinating field of study with forex trading. It is well worth the effort to read up as much as possible, absorb useful tidbits of information, and understand the relationships that exist in the financial markets.

You can deposit funds and trade blindly, but that’s not a recipe for success. We encourage you to take advantage of all of our trading tools and resources, insights, technical and fundamental analysis to enhance the efficacy of your forex trades. Know what drives the markets, apply sound principles, and trade with confidence. Demand and supply factor heavily into the speculative world of forex trading. Stick with us, as we introduce you to important trading terms, concepts, and features. A wide world of opportunities awaits with forex trading.

Getting Started with Forex Trading

Our trading platform is easy-to-use. As a beginner, all that’s required is to register an account, deposit, and trade. Pick a currency pair you’re familiar with. Next, decide whether you wish to buy the pair (go long), or sell the pair (go short). Your decision should be based on sound analysis. All forex trading on our platform is conducted in the form of CFDs. These contracts for difference are derivative instruments that track the price of the underlying pair being traded.

There are many variables to consider when trading forex online, but it makes for fascinating learning. The dynamic world of FX trading presents many opportunities to new traders and seasoned traders alike. Markets can whipsaw at any time, based on news, data releases, geopolitical events, economic shocks, or cyclical patterns. Anything that can impact the markets will impact currencies. By taking an active interest in these issues, you will invariably broaden your horizons and become a better trader.

Success in forex trading is a long-term endeavor. Stay focused. Stay invested. Stay the course!