The Forex Market

The Forex Market

The forex market is the world’s largest decentralized market, with an average daily turnover of around $4 trillion.
Currencies are bought and sold over the counter directly between the buying and selling parties over a vast electronic network.
When we talk about currencies, we refer to a pair of currencies like EUR/USD or USD/JPY which are traded simultaneously with each other according to their relative value.

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What is Forex? And how does it work?


Forex trading is the trading of currencies from different countries against each other.

Forex is the acronym of Foreign Exchange.

There are a lot of currencies in the world, for example in Europe, they call their currency Euro (EUR) and in the United States, the US Dollar (USD). So, if you are in Los Angeles you would need to buy Euro and simultaneously selling your Dollars (usually your bank is doing this for you by converting). This process is called "going long on the EUR/USD"

Usually, the forex trading can be done through a broker or market maker. As a forex trader you pick a currency pair that you expect to change in value and trade accordingly.

You can place an forex trade on the market which is called 'orders'. With a few clicks, the broker then passes the order along to a partner in the Interbank Market to fill your position (just a simple term that means, fulfilling what you wish to buy and sell). This is all a bit like casino: you are thinking that a certain currency pair will go up, but then it goes down. In that moment, the broker  closes the position on the Interbank Market and credits your account with a loss - or you are lucky and calculated it well, the currency pair goes up and you make a gain and the broker credits your accounts. Believe it or not, but this can all happen within seconds.

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The cool sides of doing forex trading

Once you decided to enter into forex (foreign exchange) trading, there are cool advantages:

1. "The market is open 24/7"

Try to imagine you go to a real market, but you need to do so before 8pm because it will close then. This is not the case with forex; since the market is worldwide, trading goes on continuously. Somewhere around the world, a financial center is open for business, and banks and other institutions exchange currencies, every hour of the day and night with generally only minor gaps on the weekend. . Usually, markets open in Australia on Sunday evening, and ends after New York hits the Friday evening clock, in between it passes the time zones in Sydney, Tokyo, Hong Kong, Singapore, Moscow, Frankfurt-on-Main, London. Essentially foreign exchange markets follow the sun around the world, giving traders the flexibility of determining their trading day.


(photo courtesy: gainscope.com)


2. "Keep it flowing!"

With flowing, we are referring to high liquidity which is the ability of an asset to be converted into cash quickly and without any price discount. Without sounding too bookish, we mean to say that in forex you can move large amounts of money into and out of foreign currency without minimal price movement.


3. "It doesn't cost the world!"

In forex trading, usually when you buy and sell the cost for a transaction is built into the price, which is called the spread. You can imagine the spread like a box you ordered and the transportation costs are already included in the whole price. That's it.


4. "Play high!"

Actually, you can use $1,000 capital to control a trade of $50,000 worth. That is what is called leverage. Leverage is the ability to trade more money on the market than what is actually in the trader's account. If you were to trade 50:1 leverage, you could trade $50 on the market for every $1 that was in your account.


5. "I am an opportunity seeker!... lets go short and long!"

Sometimes, it takes a good deal to see an opportunity rising, for instance, you think a currency pair is going to increase in value, you could buy it before it does (buying = to go long). But if you think it will decrease in value, you could simply go short and sell it. There is always a profit potential from rising and falling prices.

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