Forex (meaning FOReign EXchange) is the acronym used for the international market where currencies are traded against each other. Because of this, the prices of assets on Forex are determined exclusively by the forces of supply and demand.
The Forex market can be thought of as a large exchange booth where currencies are bought and sold against each other. If you know, for example, that the dollar is going to increase in value, you buy dollars right now, wait for the currency to rise in value and then sell your dollars for another currency later at a higher price. This is essentially how things work on the Forex market. The only difference, of course, is that on the Forex market the volumes are much larger.
The fact that the price of currencies is in constant fluctuation is what makes earning money on the Forex market possible at all times. Since currencies are priced relative to each other, a loss of value in one currency necessarily entails a gain in another currency. This brings us to the idea of a currency pair, one most important concepts in trading currencies.
A currency pair simply represents the price of one currency in terms of another. For example, when it is said that "EURUSD is 1.2505" it means that 1 euro costs 1.2505 dollars.
The Forex market is open 24 hours a day from Monday to Friday. Although there aren't necessarily any trading sessions, like with stock exchanges, banks in different parts of the world have different trading hours.
In the table below, you can see when Forex trading opens and closes at banks around the world. When trading, you should take these times into account, as markets opening and closing can have an impact on the level of trading activity. Times are listed in GMT (Greenwich Mean Time), EET (Eastern European Time, the time used on our servers and in our trading platforms).
The main participants on the Forex market:
Commercial banks are responsible for the main volume of currency operations. Other market participants hold accounts in these banks from which they conduct their own business.
Central banks regulate the currency market and can influence demand for a currency by increasing or decreasing supply of a given currency.
International investment funds buy stocks and bonds, while businesses make investments in foreign countries.
Companies that do business abroad use currency for settling accounts with their foreign partners.
Some countries have a currency exchange which sets the exchange rate and provides exchange
services to businesses.
Brokerage companies are intermediaries which connect buyers and sellers. Brokers charge a fee for their services,
generally a certain percentage of the amount being exchanged.
It wasn't until 1986 that private investors gained the opportunity to trade on the Forex market.
Thanks to the development of the internet, the popularity of trading currencies continues to grow with every passing year.
Every currency has a three-letter code. For example, the currency pair United States dollar and euro looks like this: EURUSD. The left-hand side currency (here, EUR) is traditionally called the base currency, whereas the second currency is called the quote currency (USD in this case).
Each currency on the Forex market can be both bought and sold; therefore, each currency has two prices: Bid and Ask.
The difference between Ask and Bid is called the spread.
The volume of a trade is measured in units called "lots." The standard volume for a trade on the Forex market is 100,000 units of the base currency. As recently as several years ago, a trader had to have a lot of money on his trading account. Now, however, thanks to leverage, this is no longer the case. Leverage means that you can trade with much larger sums of money than you actually have at your disposal. The funds you do have are used in a fashion similar to a security deposit. For example, "leverage equals 1:100" means that you only need to have on your trading account 100 times less money than the amount of the trade.
The margin on your account is the money available to secure the use of leverage.
All trades are made through a special program called a trading terminal which is provided by the broker free of charge. You can download the terminal that best suits your trading style.
Let's assume that the EUR/USD exchange rate is 1.2505 / 1.2509. Let's say you've done your analysis and you think the euro is going to rise in value against the dollar. You decide to buy 10,000 EUR (0.1 lots) at 1.2509 (the ask price).
This means that you bought 10,000 EUR and paid 12,509 USD (this is derived from the exchange rate). Keep in mind that you don't actually have to have 12,509 USD available in your account to make this trade because the broker will lend you the necessary amount to make the trade. You only need to have in your account a certain percentage of that, which serves as a security deposit. Let's suppose the leverage in this instance is 1:100. This means that you only need to provide 1/100 of the amount, or 125.09 USD, to make this trade.
Let's say your analysis turns out to be accurate and the euro does indeed rise against the dollar. You decide to sell at 1.2599 / 1.2603. So we are now selling our euros (i.e. doing the reverse of the original transaction). We sell at the lower of the two prices, 1.2599 (the bid price).
So now we are buying back the 10,000 USD that we started with. But now we are selling at a higher price (1.2599). We end up with 12,599 USD. Once the broker takes the 12,509 USD that was originally lent to us, we end up with a profit of 90 USD. Keep in mind we only started with 125 USD, so we ended up doing quite well.Become a Client
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