.jpg)
What is Forex Trading?
"Forex" stands for foreign exchange;
it's also known as FX. In a forex trade, you buy one currency while
simultaneously selling another - that is, you're exchanging the sold currency
for the one you're buying. The foreign exchange market is an over-the-counter
market.
Currencies
trade in pairs, like the Euro-US Dollar (EUR/USD) or US Dollar / Japanese Yen
(USD/JPY). Unlike stocks or futures, there's no centralized exchange for forex.
All transactions happen via phone or electronic network.
For
example, imagine a situation where the U.S. dollar is expected to weaken in
value relative to the euro. A forex trader in this situation will sell dollars
and buy euros. If the euro strengthens, the purchasing power to buy dollars has
now increased. The trader can now buy back more dollars than they had to begin
with, making a profit.
Compare this to the New York Stock Exchange,
which has a daily turnover of around US$50 billion and it’s easy to see how the
foreign exchange market is the biggest financial market in the world.
Essentially, forex trading is the act of simultaneously buying
one currency while selling another, primarily for the purpose of speculation.
Currency values rise (appreciate) and fall (depreciate) against each other due
to a number of factors including economics and geopolitics. The common goal of
forex traders is to profit from these changes in the value of one currency
against another by actively speculating on which way forex prices are likely to
turn in the future.
Unlike most financial markets, the OTC
(over-the-counter) forex market has no physical location or central exchange
and trades 24-hours a day through a global network of businesses, banks and
individuals. This means that currency prices are constantly fluctuating in
value against each other, offering multiple trading opportunities.
Why trade Forex?
With
average daily turnover of US$4 trillion, forex is the most traded
financial market in the world.
A true
24-hour market from Sunday 5 PM ET to Friday 5 PM ET, forex trading begins in
Sydney, and moves around the globe as the business day begins, first to Tokyo,
London, and New York.
Unlike
other financial markets, investors can respond immediately to currency
fluctuations, whenever they occur - day or night.
Other
people consider:
One of the key elements behind forex’s
popularity is the fact that forex markets are open 24-hours a day from Sunday
evening through to Friday night. Trading follows the clock, opening on Monday
morning in Wellington, New Zealand, progressing to Asian trade spearheaded out
of Tokyo and Singapore, before moving to London and closing on Friday evening
in New York.
The fact that prices are available to trade 24
hours a day helps to ensure that price gapping (when a price jumps from one
level to the next without trading in between) is less and ensures that traders
can take a position whenever they want, regardless of time, though in truth
there are certain ‘lull’ times when volumes are below their daily average which
can widen market spreads.
Leverage
Foreign exchange is a leveraged (or margined)
product, which means that you are only required to deposit a small percentage
of the full value of your position to place a forex trade. This means that the
potential for profit, or loss, from an initial capital outlay is significantly
higher than in traditional trading. Find out more about risk management.
Pricing
All forex is quoted in terms of one currency
versus another. Each currency pair has a ‘base’ currency and a ‘counter’ currency.
The base currency is the currency on the left of the currency pair and the
counter currency is on the right.
For example, in EUR/USD, EUR is the ‘base’
currency and USD the ‘counter’ currency. Forex price movements are triggered by
currencies either appreciating in value (strengthening) or depreciating in
value (weakening). If the price of EUR/USD for example was to fall, this would
indicate that the counter currency (US dollars) was appreciating, whilst the
base currency (Euros) was depreciating.
When trading forex prices, you would buy a
currency pair if you believed that the base currency will strengthen against
the counter currency. Alternatively, you would sell a currency pair if you
believed that the base currency will weaken in value against the counter
currency. Some examples of major currency pairs are:
·
EUR/USD (The
value of 1 EUR expressed in US dollars)
·
USD/CHF (The
value of 1 USD expressed in Swiss francs)
Pips (Percentage in Points)
Pip stands for Percentage in Points. Most of
our currency pairs are quoted to 5 decimal places with the change from the 4th
decimal place (0.0001) in price commonly referred to as a ‘pip'. For example,
if the price of the EUR/USD forex pair moved from 1.33800 to 1.33920, it is
said to have climbed by 12 ‘pips’ (92-80=12).
Spread
The difference in the BID/ASK of the currency
pairs is referred to as the 'spread'. An example would be EUR/USD dealing at
1.33800/1.33808 (in this case the spread is 0.8 pips or 0.00008). The
exceptions to this are the JPY pairs which are quoted to just 2 decimal places.
A USD/JPY price of 97.41/97.44 displays a 3 pip 'spread'.
.jpg)
What affects forex prices?
Forex prices are influenced by a multitude of
different factors, from international trade or investment flows to economic or
political conditions. This is what makes trading forex so interesting and
exciting. High market liquidity means that prices can change rapidly in
response to news and short-term events, creating multiple trading opportunities
for retail forex traders.
Some of the key factors that influence forex
prices are:
·
Political and
economic stability
·
Monetary Policy
·
Currency
intervention
·
Natural
disasters (earthquakes, tsunamis etc)
WHAT IS AN EXCHANGE RATE?
The
foreign exchange market is a global decentralized marketplace that determines
the relative values of different currencies. Unlike other markets, there is no
centralized depository or exchange where transactions are
conducted. Instead, these transactions are conducted by several market
participants in several locations. It is rare that any two currencies will
be identical to one another in value, and it's also rare that any two
currencies will maintain the same relative value for more than a short period
of time. In forex, the exchange rate between two currencies constantly
changes.
For
example, on January 3, 2011, one euro was worth about $1.33. By May 3,
2011, one euro was worth about $1.48. The euro increased in value by
about 10% relative to the U.S. dollar during this time.
Who trades currencies?
Daily
turnover in the world's currencies comes from two sources:
·
Foreign trade (5%). Companies buy and sell products in foreign countries, plus convert
profits from foreign sales into domestic currency.
·
Speculation for profit (95%).
Most
traders focus on the biggest, most liquid currency pairs. "The Majors" include US Dollar,
Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian
Dollar. In fact, more than 85% of daily forex trading happens in the major
currency pairs.
إرسال تعليق