What is Forex Trading – Complete Guide for Beginner

What is Forex Trading:

Might you hear the name “Forex” many times in your life you also hear that many people are creating their wealth by trading FOREX? Now the question comes to your mind “what is forex trading” Let us see.

Forex is also called foreign currency exchange or simply FX. Forex is a conversion of one currency into another currency. It is the most traded asset in the world. The daily traded volume of forex is more than $5 trillion. In this article, we are going to discuss briefly all about forex.

Forex trading is the process of buying and selling currencies in the foreign exchange market. The foreign exchange market is a global decentralized market for the trading of currencies. This market determines the foreign exchange rate. It includes all aspects of buying, selling, and exchanging currencies at current or determined prices.

In terms of trading volume, forex trading is by far the largest market in the world. The average daily trading volume in the global forex market is estimated to be around $5 trillion.

The foreign exchange market is open 24 hours a day, five days a week (except weekends). The major participants in the forex market are large international banks. Other participants include central banks, commercial banks, hedge funds, retail investors, and other financial institutions.

The foreign exchange market is the most liquid financial market in the world. This means that there is a large number of buyers and sellers in the market and that there is always a ready market for currencies.

Most forex trading is done in the spot market, which is the market for immediate delivery of currencies. The spot market is a decentralized market, with no central exchange or clearing house. Transactions are instead conducted between two parties directly, over the counter (OTC).

How can you benefit from exchange rate changes?

The price of currency pairs changes all the time, the trader makes a profit from those changes. For example :

You go abroad and you convert $500 into euros. After 1 week you come back without spending a single euro and exchange your euros into USDs and you get $505. Here you make a profit of $5 by trading currencies.

Nowadays due to the advancement of technology you don’t need to leave your house to trade currencies. You can trade currencies by sitting at home also with the help of a smartphone and you can make a potential profit by trading currencies.

Which Currencies Can You Trade?

There are many currencies you can trade. Are divided into the following type

1) Majors – 80% of the entire exchange. EUR/USD USD/JPY GBP/USD AUD/USD USD/CHF NZD/USD USD/CAD

2) Cross Pairs – Currency pairs do not include US Doller 

3) Exotic – One major currency and other currency of an emerging economy. EX- USD/ZAR

Concept of Pips

Now, this is the time to understand the concept of pips, PIP stands for Percentage In Point. For most currencies, it corresponds to the movement of one unit of the fourth decimal of the exchange rate. But there are some exceptions like the Japanese Yen which corresponds to the movement of a second decimal digit

Trading time of forex

The forex market opens for 24 hours except for Saturday and Sunday 

The forex market is open 24 hours a day. It provides a great opportunity for traders to trade at any time of the day or night. However, when it seems to be not so important at the beginning, the right time to trade is one of the most crucial points in becoming a successful Forex trader.

A lot of forex market activity happens between the opening of the Sydney exchange at 5 p.m. Sunday and the closing of the New York exchange at 5 p.m. Friday. The Sydney-New York overlap is between 8 p.m. and 2 a.m. Sunday evening; this overlap sees the highest volume of trading.

As a result, a 24-hour trading environment was created, resulting in different trading sessions, or forex trading hours, which directly impact the liquidity of the market.

Leverage Currency Trading

In the forex market, many of the brokers provide leverage up to 1:1000

But smart trader uses less leverage as per their convenience. 

Let’s take one example, you choose a 1:500 leverage scale then here you can invest $500 per $1. 

Forex Terms to Know

Major Currencies

Major currencies are the most traded currencies in the forex market. They include the U.S. dollar, the euro, the Japanese yen, the British pound, the Swiss franc, the Canadian dollar, and the Australian dollar.

Major currency pairs are those that include a major currency and the U.S. dollar. The most traded major currency pairs are EUR/USD, USD/JPY, GBP/USD, USD/CHF, and USD/CAD.

Minor Currencies

Minor currencies are those that are not as actively traded as major currencies. They include the currencies of emerging economies and small countries. Minor currency pairs are those that include a minor currency and the U.S. dollar. The most traded minor currency pairs are EUR/GBP, AUD/USD, and NZD/USD.

Exotic Currencies

Exotic currencies are those that are not as actively traded as major and minor currencies. They include the currencies of small countries with economies that are highly dependent on a single commodity or a small number of commodities. Exotic currency pairs are those that include an exotic currency and the U.S. dollar. The most traded exotic currency pairs are

Risks of Forex Trading

The risks of forex trading are real and substantial. Understanding the risks of forex trading is important for investors and potential investors.

The forex market is risky because it is a highly leveraged market. Leverage is the use of borrowed money to increase the potential return on investment. In the forex market, leverage can be as high as 400:1. This means that an investor can control $400 worth of currency for every $1 that is invested.

While leverage can increase the potential return on an investment, it can also increase the risk. This is because an investor can lose money if the currency they are invested in declines in value.

Another risk of forex trading is that the market is highly volatile. This means that currency values can change rapidly. This can result in large losses for investors.

Another risk of forex trading is that the market is not regulated. This means that there is no central authority that oversees the market. This can make it difficult to resolve disputes.

Finally, another risk of forex trading is that the market is open 24 hours a day. This means that an investor can trade at any time. This can result in large losses if an investor is not careful.

So keep these points in mind and trade forex carefully.

Hope you know What is Forex Trading. If you have any questions let us know by commenting below.

Thank you! Happy Investing!