Forex

Forex Meaning and Principle of Work

Forex is a short form of “foreign exchange.” Think of it as a worldwide network that connects buyers and sellers who own different currencies and want to exchange them on purpose. A basic example of a Forex trade is when a tourist exchanges the currency of their home country into a local currency to make payments. Folks who we call Forex traders focus on making multiple buy and trade operations via special Forex trade platforms to generate income using exchange rate fluctuations. 

How Currency Market Works

The entire currency market is run by a global banking system that unites all banks via major Forex trading centers located in New York, London, Sydney, and Tokyo. Due to this, professionals can trade 24 hours a day without interruptions. Central banks of countries can regulate their currency exchange rates by making economic decisions. 

It’s also important that there are 3 Forex market types:

  • Spot market – this involves physical exchange of currency pairs “on the spot” where the trade is conducted or simply within a short timeframe. 
  • Forward market – trading on the forward market involves contracts that require buy or sell operations when a currency reaches a specified price at a set date or within a specified period. 
  • Future market – it’s a legally binding Forex trading type that involves a contract that specifies the date and currency price for trading or selling. 

Of course, Forex traders don’t have to deliver currencies themselves. They make exchange rate predictions to speculate on price movements instead. 

Base & Quote Currencies

All Forex pairs consist of two different currencies. A base currency is the one displayed on the left, while the quote currency is always displayed on the right. The price of a Forex pair shows how much base currency you can obtain in the quote currency. For example, the exchange rate of the major GBP/USD pair was 1.3208 on the day we made this guide. This rate means that 1 Great British pound is worth 1.3208 US dollars. The rule of thumb is that a rise in base currency price against quote price will increase the pair price and vice versa. Traders buy pairs if they expect a rise (go long) and sell the pairs they have (go short) if there’s a sign that the base currency is going down soon. 

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The trading process involves several important items every trader must know:

  • spread – the difference between buy and sell prices for a pair;
  • lot – lots are chunks of currency that include a specific number of currency units. As a rule, lots are large and include 10,000, 50,000, 100,000, or more currency units. Not many traders can operate such huge amounts in dollars or other expensive currencies and use leverage to borrow enough units from their brokers
  • leverage – this instrument lets traders gain sufficient market exposure without the need to hold huge deposits on their accounts; 
  • margin – it’s an initial deposit required for opening a leveraged position. For example, a margin for a $100,000 position can be $1,000. 

Enough to Trade?

As this was only an intro into the world of Forex trading, you need to go deeper into the details of each described process and instrument before you start trading. Knowledge is a base for your trading practice in the future. 

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