By definition Forex “the foreign exchange market (Forex, FX, or currency market) is a global decentralized market for the trading of currencies. It includes all aspects of buying, selling and exchanging currencies at current or determined prices.” In simple terms, Forex is the foreign exchange market in which various global currencies are traded. It is one of the most liquid markets in the world and daily trading volumes often exceed the trillions – more than $5 trillion to be exact.
Fun fact? The entire world’s stock markets combined don’t even come near this kind of volume. Does this not paint the picture of how many market participants there are and how engaged they are in the Forex market? Forex has been around long before Forex came to be, if you know what I mean. Taking an even closer look at the Forex markets, you may find that there are unbelievable opportunities for investments, if you can handle the heat that is.
PHYSICAL FOREIGN EXCHANGE
Now Forex goes beyond digital trading. Have you ever travelled abroad? Say you were travelling to Italy but lived in the United Kingdom. You would need to change your Euros (Italy’s national currency) to Pounds (the UK’s national currency). To determine how many Pounds you would get for your Euros, the foreign exchange would look at the current exchange rates which are calculated based on supply and demand.
Below is an example of what the current exchange rate from Euros to Pounds is. So, today, for each Euro you would get 88 pence. Now this is a physical example of foreign exchange because you would have the money in your hands, not trading on speculations of future prices but nevertheless congrats, because you’re already taking part in the Forex markets.
DIGITAL OPPORTUNITIES – WHAT DO YOU THINK?
As previously mentioned, Forex goes beyond digital trading, but digital trading is a massive part of it. Just like any other investment vehicle (stocks, commodities, Cryptocurrencies) you can speculate on the future price of a certain currency and put your money where your mouth is. The difference with trading as opposed to physically owning the money, is that you can capitalize whether said currency appreciates or depreciates.
If you physically owned the currency, the truth is that if it lost its value it would be useless to you, but not here, not in the Forex markets. When you think a currency, let’s say the Japanese Yen (JPY) is going to appreciate you would buy it, where as if you think it’s value is going to depreciate you would sell it. Both of these scenarios would be winning or profitable trades because you would have guessed the market’s direction correctly.
Now of course, this isn’t always the case and not all trades are profitable. If you think the YEN will appreciate and the market goes the other way, then you have yourself a losing trade. But it’s okay, don’t fret, the markets move in cycles and there’s always the possibility of redeeming your losses. Going back to the trillions in trading volume, as with any transaction you need a buyer and a seller, right? With this kind of volume, finding a seller when you’re buying or a buyer when you’re selling is significantly easier than in any other markets. Again, the Forex markets are the most liquid.
Let’s look at another possible scenario. You hear on the news that China’s planning on devaluating their currency because they want to increase business in the country, basically increase exports. After doing your fundamental and technical analysis you decide that this trend will continue. To partake in the digital aspect of forex trading you would then sell the Yuan (China’s national currency) against let’s say, the U.S Dollar.
The more the ¥ loses value against the USD (keep in mind you’ve shorted this position) the more profits you get to reap. The ‘not so nice’ scenario would be the ¥ appreciating while you have shorted the position. That’s when you get out and start planning your next move.
FOREX – BUYING AND SELLING
Since we touched on buying and selling, let’s talk about currency pairs. All FX trades contain two currencies because in essence what you’re doing is trading on the value of a currency against another. The most popular and traded currency pair is the EUR/USD. There are two parts to this pair, first off, we have the Euro which appears first in the pair and is the base. Then we have the USD which is second in the pair and is the counter or quote currency. When you see a figure like EUR/USD 1.18186, it means that for each Euro you get 1.18186 Dollars.
When you click buy or sell, you are always buying or selling the base currency against the quote. To make things even clearer let’s look at another example. You heard one of Draghi’s speeches, which tend to make the EUR shake. Mr. Draghi had a dovish tone which you took as an indication that the Eurozone isn’t doing that well. You now believe that the EUR will depreciate against the Dollar, because the Non-Farm Payrolls came in better than expected giving the Greenback a boost. The pair you are looking for is the EUR/USD. If your base currency is the EUR and you think the EUR will depreciate then you would sell or short this position.
KINDS OF CURRENCY PAIRS
To keep it simple, there are three kinds of currency pairs – majors, minors and the exotics.
As you can see all major currency pairs include the Dollar and for good reason. As one of the world’s leading reserve currencies it’s involved in more than 85% of trades.
The most popular and widely traded minor currency pairs are ones that include either the EUR, the Yen or the Great British Pound. The Japanese Yen is considered a safe haven by traders.
Exotic pairs aren’t the most popular when it comes to trading but that doesn’t mean they should be discarded.
FROM THE EUROPEFX TEAM
It is our utmost priority to make sure our clients have the necessary tools to tackle their ambitions and we try to the best of our abilities to provide not only the ideal trading environment but stellar customer support, because as we all know, this industry is tough and sometimes we all need a little help.
There’s no handbook as to what you should be trading but whatever you choose to trade, know this, the more informed your decisions are, the more golden your opportunities will be. I hope this article gives you an overview of what the Forex markets are and how they work. Stay tuned because there’s more where this came from.
This article is for educational and informative purposes only and should not be considered as investment or trading advice.