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Forex Basics

Forex Basics

FX or Forex describes the Foreign Exchange Market, a marketplace where the world’s various currencies are traded. Its huge volume and fluidity made the Forex market the largest and most significant financial market in the world, with well over $4 trillion traded daily which is almost 10 times larger than the stock market. Due to the fact that forex currency trading has no centralized marketplace, currencies can be traded in whatever market is open at any given time, creating a great opportunity for traders to buy and sell currencies around the clock 24 hours a day, 5 days a week with the exception of weekends.

The major participants of the Forex market are commercial and central banks, large corporations and hedge-funds. However, you do not need to have millions or thousands of dollars to start!  Due to leverage and marginal trading, you can start trading with $100 or $500 and enjoy the same trading conditions as the large market players.
The recipe for success is to buy it at the cheapest price and then sell at a higher price. Or the other way round – sell at a higher price and then buy cheaper. Whether a currency is increasing or declining in value, there is always a way for you to make money in Forex. Knowing the right time to buy or sell will do the trick. This is where market analytics, indicators, signals and automated trading systems come in handy.


Let’s consider an example:

Currencies are traded in pairs and first part of pair is called base currency i.e. Euro against US Dollar (EUR/USD). A Forex transaction involves buying one currency and selling the other currency at the same time. The exchange rate reflects the value of one currency against the other currency.

For example, the quote EUR/USD 1.11762/1.11779 shows how many US Dollar you need to pay to buy or sell 1 EUR. Currency exchange rates are always fluctuating depending on the time of the day, the country’s central bank rate, government policy, market sentiment and many other reasons.

Let’s assume the market forecast the Euro is going to appreciate against US Dollar (bullish trend for EUR/USD). You decide to buy Euros with USD (buy order on EUR/USD). After some time you decide to sell the Euro at a higher price (close the open EUR/USD position). Your profit is the difference between the opening and the closing prices.

Advantages of Forex

Some of the advantages of forex trading are listed below, which explains why forex is fastest growing market in the world.


24/5 Hour Market

The main advantage of forex (foreign exchange) is that is open around the clock 24 hours as day 5 days a week, enabling traders to buy and sell form Sunday night to Friday night. A true 24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, London, and New York. The greatest liquidity occurs when multiple time zones overlap.


High Liquidity

One of the main benefits of the forex market is its superior liquidity. The foreign exchange market is the most liquid market in the world. This is one of the main differentiating factors between the forex market and other financial markets. In Forex there are always traders who are willing to buy or sell. The market never sleeps.


Minimum Investment

Generally the amount required to trade forex is lower than what would be required to enter into other financial markets. Leveraged (or marginal) trading used in Forex lets you operate funds many times as large as your margin deposit


Leverage

Forex is typically traded on leverage. Leverage allows means that a lower initial outlay is required to control a larger position. For example if a trader had $200 in your trading account and had leverage of 500:1 the trader would be able to open a position with a value of $100,000.


Trade both Rising and Falling Markets

In Forex, there is always a chance to earn as you can trade in any direction. This means that if you believe that a currency pair is going to increase in value you can buy it or ‘go long’. Similarly, if you believed that the pair was going to decrease in value you could sell it, or ‘go short’.


Non Standardized contract sizes

Forex is an Over the Counter market which means that the contract sizes can be determined by the broker rather than an exchange. This means Forex traders have no fixed lot size and can trade any amount between 0.01 lots (1 micro lot) and 1 lot (100,000 units). This gives trades a greater ability to manage their risk. 


Automated trading

You do not have to spend long hours in front of your computer studying charts and following all the price movements. With automatic indicators and signals you will be notified immediately of any important events or trend reversals. You can also take advantage of expert advisors, that are based on your own or somebody else’s proven trading strategy. An Expert Advisor trades automatically without your participation


Transparency

In some exchange based markets, larger players have been known to move stock or commodity in order to gain an advantage. Given the deep liquidity in the foreign exchange market is it almost impossible to interfere with general market forces.

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