What is forex trading?
Forex, or foreign exchange, is a marketplace where currencies are bought and sold at agreed-upon prices. It enables individuals, businesses, and central banks to convert one currency into another. Whether you are a seasoned trader or just starting out, understanding forex trading can significantly increase your financial knowledge.
Much of forex trading is driven by profit-seeking despite its common roles in global commerce and financial transactions. The significant daily trading volume transacted can cause substantial price fluctuations. This volatility attracts traders seeking potentially lucrative opportunities, but it also entails heightened risks.
Characteristics of Forex markets
The Forex market is unique, and here’s why:
- Forex trading is completely decentralized. Trades occur directly between buyers and sellers without a central exchange.
- It’s massive with trillions of dollars traded on a daily basis.
- It never stops except on the weekends because different time zones overlap and create one big continuous session.
- It’s extremely liquid and constantly moving, creating potential high risk, high reward opportunities around the clock.
Spot forex market |
Currencies are exchanged immediately or within a short period of time after the trade is agreed upon. Hence why it is called “Spot” because it occurs right on the spot. |
Forward forex market |
Contract is made to buy or sell a specific amount of currency at a fixed price. This transaction is settled at a future date. |
Future forex market |
A contract to buy or sell an amount of currency at a predetermined price and date in the future. Unlike forwards, futures contracts are legally binding agreements. |
How does forex trading work?
Forex trading is all about buying one currency while selling the other at the same time. Nowadays, trading is done online, whether on a retail or institutional level. Back in the day, and before the days of CFDs and powerful trading technology, most of the trading was done over the phone.
Speaking of Contracts for Difference (CFDs), these are leveraged products that allow you to speculate on a wide range of assets. This means you can open a position with a fraction of the trade’s full value. Instead of owning the asset itself, you predict whether the market will rise or fall, potentially amplifying both your profits and losses.
What is a base currency?
In forex trading, the base currency is the first currency listed in a pair. The second currency is called the quote currency. Trading always involves buying one currency whilst selling the other, so forex prices are quoted in pairs. Essentially, the price of a forex pair tells you how much one unit of the base currency is worth in the quote currency. Currencies are represented by three letter codes. These codes usually have two letters for the country or region and one letter for the currency. For instance, in the GBP/USD pair, GBP stands for the British pound, and USD stands for the US dollar. So, when you trade GBP/USD, you are buying the British pound and selling the US dollar.
| Major pairs | These include most traded currencies globally, making 80% of forex trading. | EUR/USD, USD/JPY, GBP/USD, USD/CHF |
| Minor pairs | Featuring major currencies paired against each other, excluding the US Dollar. | EUR/GBP, EUR/CHF, GBP/JPY |
| Exotics | Major currencies paired with currencies from small or emerging economies. | USD/PLN, GBP/MXN, EUR/CZK |
| Regional pairs | Pairs grouped by geographic regions, reflecting regional economic relationships. | EUR/NOK, AUD/NZD, AUD/SGD |
What is a spread in forex trading?
The spread is the difference between the buy and sell spices quoted for a forex pair. When you open a forex position, you’ll see two prices. To go long, you trade at the buy or ask price, which is slightly above the market value. To go short, you trade at the sell or bid price, slightly below the market price.
What is a lot in forex?
Forex trades are standardized in lots, with a standard lot being 100,000 units of the base currency. Since lots are so large, most forex trading is leveraged. This means you don’t need to provide the full amount upfront, making it accessible to individual traders.
At Stonefort, you can trade with smaller sizes starting with 0.01 lot. In other words, you can trade as small as 1,000 units at a time.
What is leverage in forex?
Leverage allows you to control large amounts of currency with a small deposit, known as the margin. Your profit or loss is based on the full trade size. While leverage can boost your profits, it also increases the risk of significant losses, highlighting the importance of risk management.
What is the margin in forex?
Margin is the initial deposit required to open and maintain a leveraged position. It varies based on your broker and trade size, usually expressed as a percentage of the full position. For example, a 2% margin on EUR/GBP means you only need to deposit £200 to open a £10,000 position.
What is a Pip in forex?
Pips are the units used to measure movements in a forex pair. Typically, a pip is a one-digit movement in the fourth decimal place of a currency pair. However, for currencies that include Japanese yen, a pip is a movement in the second decimal place.
Benefits of forex trading
Forex trading is an attractive market for a variety of reasons. Here are a few:
Profit in Any Market Direction
In forex trading, you can profit whether a currency pair rises or falls. In other words, Forex lets you buy (go long) if you believe a currency will strengthen or sell (go short) if you expect it to weaken. This flexibility allows traders to capitalize on market trends and economic indicators, adapting their strategies to maximize profit potential.
Accessible Around the Clock
Forex markets operate 24/5, spanning across different time zones globally. Unlike stock markets with fixed trading hours, forex starts on Sunday evening and continues until Friday evening (UK time), enabling traders to react swiftly to news and market developments. This accessibility suits both full-time traders and those trading part-time around other commitments, offering flexibility to seize opportunities as they arise.
Be mindful that some periods are slower than others. For example, just after the close of the US session, the markets tend to be slow before the Asian session opens up, at which point the action picks up again.
Liquidity and Lower Costs
Forex trading entails high liquidity, with trillions traded everyday. This ensures traders can enter and exit positions quickly without significantly impacting prices. Tight bid-ask spreads and lower transaction costs compared to other markets means traders can retain more of their profits. This liquidity driven environment enhances trading efficiency.
