The impact of Forex affects many aspects of our daily lives, such as the price of fuel, food, imported products, travel and much more. As consumers, all these international exchange transactions occur without our intervention. The forex market is an exciting trading environment that operates 24/5 and boasts trillion-dollar daily transaction volumes.
How to trade in Forex
We have already mentioned that the broker gives the trader access to the Forex market. Brokers are companies that connect people to the interbank market, which is where the entire trading process takes place. In short: anyone can trade the market through a Forex broker.
Brokers offer services and software so that you can carry out operations safely. Using the software, traders can follow exchange rates in real time and place orders to buy or sell currencies in a few clicks.
To start a career in trading , simply open an account with the Forex broker of your choice. This broker is remunerated for the service provided with the spread or commission.
How Does Forex Trading Work?
FX Pairs Structure
Forex trading involves buying one currency simultaneously with the sale of another, that is, exchanging one currency for another.
When you trade Forex, you will notice that prices are quoted based on a pair of currencies, which we refer to as base and quote currencies — for example, the EURUSD or GBPUSD currency pairs. The pair can also be represented as EUR/USD or GBP/USD.
Types of Currency Pairs
Largest: There are eight largest currencies in the world. However, there are only seven major currency pairs. This is because all major currency pairs have USD as their base or quote currency.
Minors: Minors, also known as cross pairs, are combinations of major currencies that do not include USD as a base or quote currency.
Exotics: Exotics are pairs consisting of a major currency and a currency of an emerging nation.
Forex trading terminology
These are some of the terms you should familiarize yourself with when starting out in forex trading:
EURUSD: represents the Euro/US Dollar currency pair.
The first currency (EUR) is the base currency. .
The second currency (USD) is the quoted currency .
Pip: A pip is the smallest change in the price of a currency pair. If the EURUSD price changes from 1.1000 to 1.1001, it can be said to have changed by one pip.
Buy/Sell Prices: There are always two prices displayed, known as the forex quote:
The first value (1.1000) is the purchase price. It is the price that the broker will pay the seller for the base currency.
The second value (1.1003) is the sales price. It is the price at which the broker will sell your base currency.
The purchase price is always lower than the sale price.
Spread: Spread is the difference between the buying and selling prices. It represents the cost of forex trading. In our example, the spread is equal to 1.0003-1.0000=0.0003 or 3 Pips
Lot: A lot is a unit of measurement. Forex is traded in lot sizes such as Standard (100,000 units), Mini (10,000 units), Micro (1,000 units) and Nano (100 units).
Leverage: Leverage is like a loan offered by retail brokers that allows traders to trade with much more capital than they have. For example, with $1,000 of capital and 100:1 leverage, you can open trades of up to $100,000.
Margin: Margin is the amount of capital required to open a leveraged position in the market. As above (leverage), $1,000 is the margin needed to open a $100,000 leveraged position in the market.
Margin Level: The margin level is the ratio between your account equity (capital) and the margin used. The higher the margin level, the healthier your account is and vice versa.
Position (Trading): As soon as you open a trade and it is exposed to the market, it is defined that it has a position. You will often see descriptions such as “open a position” or “sell a position”.
Main Participants in the Forex Trading
Big Banks: Big banks are in a prominent position in the forex trading hierarchy. They actively participate in the interbank market, which serves as a global network that facilitates substantial forex transactions exclusively between banks.
Multinationals: Large multinational companies are mainly practical participants, carrying out transactions to make their businesses viable. These multinationals generally carry out their transactions through large banks.
Central Banks: Central banks are influential participants in the forex market, aligned with their mandates to ensure the stability of their local currencies and maintain foreign cash reserves. Some of the major central banks that are influential in the global forex market include:
Speculators: Speculators buy and sell currencies with the intention of making profits. There are big speculators, such as hedge funds, and small speculators, such as retail traders (including you).
Retail traders: Also called individual traders, they trade Forex for their personal accounts and not on behalf of an organization or institution.
Why Do Forex Trading?
High liquidity: Forex is the largest financial market in the world, which makes it highly liquid. This means you can buy and sell with ease, as well as trade with tight spreads.
24 Hour Market: Money never sleeps in the market. You can search for forex trading opportunities day and night, from the Asian market session that opens on Sunday evening to the close in New York on Friday evening.
Leverage: You can open much larger positions with less capital to achieve greater potential benefits.
Decentralized Market: No single entity can control or monopolize the global forex markets.
Low Trading Costs: You only pay the spread — no additional commissions such as brokerage fees or any other unnecessary charges.
Simplicity: Buy, sell, hedge or implement any trading strategy of your choice.