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The foreign exchange market, or the so-called “Forex”, is a market in which foreign currencies are exchanged, and it is the largest market in the world, where traders in this market influence everything, from the price of clothes imported from China to how much you pay for a drink Light on your vacation in Mexico.

What is forex trading?

Forex trading is simply similar to the currency exchange that you might resort to when you travel abroad: a trader buys one currency and sells another, and the exchange rate is constantly fluctuating according to supply and demand.

Currencies are traded on the foreign exchange market, a global market that is available 24 hours a day on the days between Monday and Friday. All forex trading takes place outside the stock exchange and this process is called short “OTC”, and it means that there is no actual exchange like fiat currency exchanges, and there is no network of banks, banks, and institutions that supervise the exchange market, and there is no doubt that everyone knows that it is the largest market in the world. the world.

Most of the trading activity in the forex market takes place between institutional traders, such as people who work for banks, finance managers, and multinational corporations.

These traders do not necessarily intend to physically take possession of the currencies themselves, but may simply be speculating or hedging against future trading price fluctuations.

For example, a forex trader might buy US dollars (and sell Euros) if she thinks the dollar will gain more value, so she will be able to buy more Euros in the future.

At the same time, an American company operating in Europe may use the forex market as a hedge in case the value of the euro falls, which means that the value of the income that they have earned has fallen.

How are currencies exchanged?

All currencies have a three-letter symbol, such as the stock ticker symbol. While there are more than 170 currencies in the world, the US dollar is involved in most forex trading, so it is useful to know its symbol (USD).

The second most popular currency in the forex market is the euro, which is accepted in 17 countries in the European Union, and its symbol is (EUR).

Other major currencies, in order of popularity: Japanese Yen (JPY), British Pounds (GBP), Australian Dollars (AUD), Canadian Dollars (CAD), Swiss Franc (CHF), and New Zealand Dollars (NZD).

All forex trades are expressed as a pair of two currencies that are exchanged against each other.

Here are seven that the majority combine to be the best currency trading pairs that makeup 75% of trading in the forex market:

• EUR/USD
• USD/JPY
• GBP/USD
• AUD/USD
• USD/CAD
• USD/CHF
• NZD/USD

How forex trades are displayed

Each currency pair represents the current trading price of the two currencies.

Here's how to interpret such information, using the EUR/USD - or the euro-dollar exchange rate - as an example:

• The currency on the left (the euro) is the base currency.
• The currency to the right (the US dollar) is the quote currency.
• The exchange rate represents how much of the quote currency you need to buy one unit of the base currency.
• As a result, the base currency is always expressed as one unit while the quote currency varies depending on the current market and how much you need to buy one unit of the base currency. 

If the EUR/USD exchange rate is 1.2, this means that 1€ Euro will buy 1.2 dollars (or 1.2$ costs 1€)

When the exchange rate goes up, it means that the base currency has appreciated in value compared to the quote currency (because 1€ will buy more US dollars) and conversely, if the exchange rates go down, that means the value of the base currency goes down.

Quick note:

• Currency pairs are usually shown with the base currency first and the quote currency second, although there is a historical custom of how some currency pairs are expressed.

For example, USD/EUR conversions are shown as EUR/USD, not USD/EUR.

Three ways to trade forex

Most forex traders are not made to convert currencies (as is the case in exchange shops), but rather to speculate about future price movements, as is the case with stock trading. Similar to stock trading, forex traders try to buy currencies that they expect to appreciate in value compared to other currencies, or they try to get rid of currencies that they expect to have less purchasing power.

There are three different ways to trade forex, which will equip traders with multiple goals:

Spot Market: This is the primary forex market, in which currency pairs are swapped and exchange rates are determined in real-time, based on supply and demand.

Forward Market: Instead of executing a trade directly, forex traders can also enter into binding (private) contracts with other traders, to agree on a specific exchange rate for a certain amount of currencies at some point in the future.

Futures Market: Traders can choose a standardized contract to sell or buy a predetermined amount of currency at a certain exchange rate on some future date. This agreement is done through an exchange rather than occurring privately between traders, such as in the futures market.

Both the forward market and the futures market are primarily used by forex traders who wish to speculate or hedge against future price changes in currencies. Exchange rates in these markets depend on what is happening in the spot market, which is the largest forex market and the place where most forex trades take place.

Forex terms you should know

Each market has its own language. These are words you should know before entering into forex trading:

• Currency pairs: All forex trading involves currency pairs. In addition to the major currencies, there are also less common trades such as (the uncirculated, which are the currencies of developing countries).
• 1 pip: means the percentage in pips, and 1 pip indicates the smallest possible change in the price of a currency pair. Because forex rates are quoted to four decimal places, one pip is equal to 0.0001.
• Buying and Selling Margin: As with other assets (such as stocks), exchange rates are determined by the maximum value that buyers can pay for a currency (buying) and the minimum amount sellers will demand to sell (sell). The difference between these two values, and the value at which the trades will be made directly, is called the buying and selling margin.
• Bundle: Forex is traded with the so-called bundle or a standard unit of currency. The normal size of a bundle is 100,000 currency units, and there are micro-bundles (1000) and mini-bundles (10 thousand) available for trading as well.
• Leverage: Due to the large package sizes, some traders may not intend to put in much money to execute the trade. Leverage is another term for borrowing money, which allows traders to participate in the forex market without the required amount of money.
• Margin: Leveraged trading is not free, however, traders must put some money in advance as a deposit – otherwise known as margin.

What moves the forex market

Like many other markets, currency rates are determined by the supply and demand of sellers and buyers. However, there are big factors that influence this market. Demand for certain currencies can also be affected by interest rates, central bank policies, the speed of economic growth, and the political environment in a specific country.

The forex market is open 24 hours a day, five days a week, which allows traders to interact with news that may not affect the stock market until later. Because a lot of currency trading is focused on speculation and hedging, traders need to be current with movements that may cause sharp changes in currencies.

Forex Trading Risks

Because forex trading requires leverage and because traders use margin, there are risks associated with forex trading that outweigh the risks of trading other assets. Currency prices fluctuate constantly, but at very small rates, which means that traders need to execute large trades (using leverage) to earn profits.

Leverage is excellent if the trader is profiting, as it can increase profits. However, you may increase losses as well, even over the principal amount borrowed. In addition, if the value of the currency depreciates too much, users of leverage will turn to margin, which may force them to sell collateral purchased with borrowed funds at a loss. Apart from potential losses, remittance prices may accumulate and potentially reach the withdrawal of all profits.

In addition, you should remember that forex traders are trying to fish out among a group of experienced professional traders - and the Securities and Exchange Commission warns of potential scams or information that may be misleading to new traders.

Perhaps it is a good thing that forex trading is not very popular among individual investors.

In fact, retail trading (what is known as non-professional trading) occupies only 5.5% of the global market, and some of the major online brokers do not offer forex trading.

Another study showed that an average of 71% of retail forex traders lose, which makes forex a strategy best left to the professionals.

Why is forex trading important to ordinary consumers

• While it is not desirable for the average investor to get involved in the forex market, what happens there does not affect all of us.
• The current activity in the spot market will affect the value we pay to export, as well as how much we should pay for travel.
• If the value of the US dollar increases, compared to the euro, for example, it will be cheaper to travel abroad (one dollar is worth more than the euro) and buy imported goods (from cars to clothes).
• On the other hand, when the US dollar weakens, it will be more expensive to travel and import goods (but export companies abroad will benefit).

If you are going to make a large purchase of an imported commodity, or are planning to travel, it is a good idea to keep an eye on the exchange rates set by the forex market.