What is Forex?

What is forex in simple words

Let us immediately determine that forex is a market in which, online, interested people (traders) exchange one foreign currency for another at the rate of the largest global OTC participants. The market is so liquid and global that it is not tied to specific exchanges. Opening deals online is faster and more profitable than in an exchange office near your home.

However, the amounts appearing here are many orders of magnitude higher, and therefore the trading turnover of the forex market at the moment is the largest in the world. In fact, neither the stock market with all the stocks in the world, nor the metals market with all the available gold in circulation, can not compare with the forex market in terms of sales and purchases, the average daily turnover of which exceeds 6.5 trillion. dollars.

Just imagine this financial power!

 

The meaning of the Forex term

Forex (FOREX) stands for exchange (exchange) of foreign (foreign) currency. These two words form the basis of the abbreviation Forex or FX.

In this market, it is really possible to start in a split second to make transactions for the purchase and sale of foreign currency, since it operates around the clock 5 days a week and has a huge turnover. Fluctuations in currency rates are several times lower in comparison with the stock market. The combination of these properties allows brokers to provide margin trading for their clients, that is, you can open deals with a volume that significantly exceeds your current financial capabilities. For this, brokerage intermediaries provide leverage.

How does forex work?

The main thing to understand about forex is that the price of a currency is constantly changing.

Now, for example, the euro costs $ 1.2, and an hour later it costs $ 1.19. The value of one currency expressed in another is called a quote. Each such quote gets to the chart in the trading platform and puts a dot on it. This point is automatically connected to the previous mark of the asset's price. So in forex, in real time, a price chart is drawn, and traders sit in front of monitors or smartphone screens and watch how the chart changes in order to understand when to start trading.

We have already mentioned about a widespread modern solution - leverage. Its essence boils down to the fact that at the moment of opening a deal, the brokerage company adds its own additional funds to your own funds. The size of this bounty ranges from 1: 1 (when you trade only with yours) to 1: 500 (when the broker adds another 500 for every dollar you own).

Also, brokers often allow their clients to trade in smaller volumes than they are traded on the market, that is, fractional lots. The standard minimum transaction size is about $ 100,000. However, many brokers allow you to make deals with a tenth or one hundredth of this amount.

Thus, it turns out that it is possible to join trading on the global forex market and trade amounts from $ 10,000 even with a relatively small capital, that is, from $ 100.

What is Forex Traded?

The main currencies traded through online platforms are the US dollar (USD), euro (EUR), Japanese yen (JPY), pound sterling (GBP) and Swiss franc (CHF). However, you can start trading cross rates: pairs in which the US dollar is not present.

If all is well in the country and the indicators-indicators of the health of the economy are even better than expected, then the exchange rate of the national currency will most likely grow. And if the news is bad and the statistics on the region are not encouraging, then one can not count on the growth (strengthening) of the currency. In other matters, not everything is so simple, fluctuations occur within a week or day, and visual lines help to work with them, the so-called. technical indicators of trade. They help determine in which direction the price is now moving, how strong the existing trend is and what will potentially come next.

Traders are guided by these indicators and economic news from the feeds of global news agencies. Based on the entire array of information, users draw conclusions, seize the right moment to start - and open up and down trades, buy and sell.

Here's how it works: let's take as an example the most popular currency pair on the market - the euro-dollar (EURUSD). The US dollar in forex depends on the situation in America, the euro depends on the situation in the European Union. Traders around the world receive news on these regions and react to them either by increasing demand for the euro and dollar, or by decreasing.

If there are more of those on the market who are determined to buy the euro (the currency that is the first in the pair), the price of EURUSD rises. If there are more of those on the market who are determined to sell euros, the price of EURUSD falls. This is how the basic law of Supply and Demand works.

Those who believe that quotes will rise are called bulls. Those who are confident in the fall in prices are called bears.

However, if the statistics for the Eurozone is not impressive for traders, and there are more of those on the market who are inclined to buy dollars (the second currency in the pair), then the EURUSD rate will begin to decline, i.e. go in favor of the dollar. Analysts say about this situation: "The dollar began to strengthen against the euro."

Main bidders

Central banks

Their main task in the process of online trading is foreign exchange regulation in the external market, namely, to prevent sharp jumps in the exchange rates of national currencies. This is necessary in order to prevent the start of another wave of the economic crisis, as well as to maintain the balance of exports and imports. Central banks, their decisions and representatives' speeches have a direct impact on the forex market.

In the US, the main regulator is the Federal Reserve System (FRS), in Europe - the European Central Bank (ECB), in Britain - the Bank of England (BoE), in Japan, respectively, the Central Bank of Japan.

Commercial banks

They carry out the bulk of foreign exchange transactions. The rest of the market participants, through accounts opened in commercial banks, carry out the necessary exchange and deposit-credit operations.

The world's foreign exchange markets are most influenced by large international banks, whose daily volume of transactions reaches billions of dollars. For example, these are Deutsche Bank, Barclays Bank, Union Bank of Switzerland, Citibank, Chase Manhattan Bank, Standard Chartered Bank and others.

Firms that carry out foreign trade operations

Companies involved in international forex trading are divided into importers and exporters. Importers constantly demonstrate a steady demand for foreign currency, while exporters, on the contrary, offer foreign currency for sale, and also place or attract free foreign exchange funds as short-term deposits.

Companies that carry out foreign investments of assets

These are, first of all, investment funds, Monetary funds and International corporations such as Xerox, Nestle, GE (General Electric), BP (British Petroleum) and others.

Currency exchanges

In a number of key countries of the world (USA, Britain, Australia, Japan, etc.) currency exchanges operate. Their main function is to exchange currencies for legal entities and form the current trading rate for each pair. As soon as a quote appears on the exchange, it is transferred to liquidity providers, and they, in turn, transfer it to the brokerage companies with whom they have entered into a contract. This is how the new price appears in the online platforms of private traders connected to the market by the same broker.

Brokerage companies

The function of these intermediaries between the exchange and private traders is to bring the buyer and seller of foreign currency together and carry out a purchase and sale transaction between them at the current price. All transactions take place online, through proprietary trading platforms.

Brokerage companies charge a commission as a percentage of the transaction amount - a spread - for their mediation in the trading process and the entry of transactions to the market. It is the difference between the price at which traders buy a currency and the price at which they sell it.

Private persons

Personally, you can act as both a buyer and a seller. Physically, you do not need to have currency on hand for online exchange: you simply join the process of changing the price of currency pairs (speculate). It is this process that describes, in fact, all modern online trading.

How are transactions made?

Conveniently, you can buy and sell currencies (speculate on changes in quotations) online, at any time on weekdays - and even from your mobile. To do this, you need a trading platform, which is also called a terminal. This is a handy program available in a browser, as a mobile application, and as software for installation on a desktop computer.

In simple words, you open this platform and click the Sell button when you suppose that you will be able to profit from the price decrease, or click Buy when, according to your expectations, the price of the selected currency pair should rise.

This is the basic principle of forex trading. Of course, there are a lot of nuances and ways to increase the likelihood of your forecast being correct. We talk about them on the FxTeam website, and the analytical reviews that you will find here are your coordinate system. Read them regularly to feel more confident and fluent in the current Forex situation.