How to trade the Forex market

What is Forex

Forex (short for "foreign exchange") is a market where currencies from around the world are traded. This market attracts a large number of traders and investors every day, with a daily turnover of more than 500 billion dollars.

The peculiarity of this market is that unlike the stock market, which has a start and end time for trading, the Forex market is a market that operates 24 hours a day, five days a week. This facilitates international trading and investment.

In Forex, currencies are always traded in pairs. For example, the exchange rate of the euro against the US dollar is EUR/USD. When you trade Forex, you are actually exchanging one currency for another - the price of a pair of two currencies, such as EUR/USD, reflects how much you have to pay in the quoted currency to get one unit of the base currency.

Applications of Forex

Forex allows governments, investment funds, banks and traders to buy, sell, trade and speculate on changes in currency prices.

Its objectives are:

• To hedge against fluctuations in the prices of world currencies;
• Speculate on the occurrence or outcome of certain economic events;
• Diversify investments.

What is foreign currency trading

Forex trading is the buying and selling of currencies for the simple purpose of making a profit. During currency trading, traders speculate on the changes in the exchange rate of two currencies. The purpose of this speculation is to buy a currency at a lower price and resell it at a higher price in the future. Conversely, they may sell the currency at a higher price and buy it back at a lower price. It is not uncommon for some companies and traders to use Forex to hedge currency risk as part of their business or other investments.

Where to trade Forex

Here are some good brokers with integrated trading software offer Forex trading services:

• AXI;
• Vantage;
• FXlift;
• Avatrade;
• eToro.

These various brokers allow you to trade the Forex market as well as indices, commodities, cryptocurrencies and stocks using CFDs.

How Forex works

Forex is an easy market for novice traders and investors, but it's important to know a few things before jumping in. Forex trading is all about buying the base currency versus selling the base currency. There are four types of currency pairs:

Major currency pairs

Major currency pairs account for more than 85% of the Forex market and are characterized by relatively low spreads and high trading volumes. These currency pairs are the most important in the market, such as EUR/USD, USD/JPY, USD/CHF and USD/CAC.

Minor currency pairs

Minor currency pairs are pairs that do not contain the US dollar but at least one of the other three major world currencies, such as the euro, pound sterling or Japanese yen.

Exotic currency pairs

An exotic currency pair is, for example, a pairing of the US dollar and the Japanese yen. The dollar is rarely traded against other world currencies that exist in emerging economies. Generally, the risks associated with these currencies are higher than those associated with major or minor currencies.

Regional currency pairs

A regional currency pair is a currency pair that does not include the U.S. dollar, but consists of two major currencies in a specific region of the world.

Base and quoted currencies

In the world of Forex, all trades are made between the two currencies that form a currency pair.

Base Currency

In a currency pair, the base currency is the currency that appears first. It represents the currency that is being purchased. The value of the base currency is always equal to one, and the price quoted in a currency pair reflects the amount of the quote currency needed to buy one unit of the base currency.

Quoted currency

The quoted currency is the second currency in the pair. It indicates the amount of that currency available for exchange for one unit of the reference currency. The price of a currency pair is the amount of the quoted currency needed to buy one unit of the reference currency.

For example, in the EUR/USD pair, EUR is the reference currency. This means that when you buy this pair, you are buying EUR and selling USD. The US dollar is the quoted currency. The price or exchange rate shows how many US dollars (USD) it takes to buy one euro (EUR).

If the EUR/USD exchange rate is 1.20, this means that you need 1.20 USD to buy one EUR. If you believe that the EUR will strengthen against the USD, you can buy the pair and expect the exchange rate to rise. In this way, the base and quoted currencies allow you to immediately understand the direction of the exchange rate and the relative value of the two currencies.