What is the forex?

Forex Investing

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The currency market, also known as the forex or FX market, is the exchange of different currencies in a decentralized market on a global level. It is one of the largest and most liquid financial markets in the world. Forex trading involves the simultaneous buying and selling of world currency pairs, including EUR/USD and GBP/USD as major.

The currency exchange rate between different pairs shows the rates at which one currency can be exchanged for another. It plays a very important role in foreign trade and companies since products and services purchased in a foreign currency is paid for with the currency of the country of sale. Our large number of currencies suggests that there are frequent price movements for forex traders, and market volatility can increase the opportunity to profit. This possibility is one of the reasons to invest in the forex market, although it also requires prudence and attention to this fluctuating market so that it does not result in more losses than profits.

How to invest in forex

Forex is one of the markets with the most operations in the world and whose total average daily turnover exceeds 5 trillion USD per day. A common question our clients always ask us is “what time does the forex market open?” Since it is not traded on a centralized exchange, the forex schedule is determined; It is open 24 hours a day, Sunday night to Friday night. A wide range of currencies is constantly exchanged while individuals, companies and organizations conduct their global business activity and try to take advantage of fluctuations in exchange rates. 

Currency pairs

Forex trading is always done in currency pairs; for example, the GBP/USD. You can speculate on whether the price of one country’s currency will rise or fall against the price of another country and trade accordingly. Using the example of the GBP/USD currency pair, the first currency, in this case, the pound, GBP, is called the ‘base currency’ and the second, the USD is known as the ‘quote currency’.

When trading currencies, you need to speculate on whether the price of the base currency will rise or fall against the price of the quote currency. So, in the GBP / USD example, if you think that the value of GBP will rise relative to that of USD, then you will belong in the currency pair (that is, you will buy the pair). Conversely, if you consider that the value of GBP will fall against that of USD (or that the value of USD will rise against that of GBP), you will be short (that is, you will sell the pair).

The currency pairs are generally classified into the categories below:

  • Major pairs: Most trading focuses on these currencies, including AUS/USD, GBP/USD and USD/JPY.
  • Minor pairs: These currencies generally do not contain the USD and are traded less frequently, for example, the AUD/NZD and EUR/DKK.
  • Exotic pairs: are pairs made up of a major currency with a minor currency, including GBP/MXN, USD/HUF and USD/ZAR.

It is important to remember that when trading forex, a strong currency makes exports from the country more expensive for other countries, while imports are cheaper. A weaker currency makes exports cheaper and imports more expensive, therefore currency exchange contributes significantly to determining the trade relationship between two countries. (When the dollar depreciates against the euro, it is cheaper for us to buy products in dollars, and for the products in euros to become more expensive).

Forex strategies

There are a host of strategies and indicators to help you succeed in the forex market, whether it be through fundamental or technical analysis. It is advisable to incorporate a combination of both methods into your trading strategy, although a large percentage of fx traders, especially day traders, opt for forex signals and technical indicators.

The signals can provide indications to determine entry and exit points in the forex market and can be determined by manual or automated methods. Manual methods are based on observing chart patterns and averages to identify buy and sell opportunities, while automated methods use algorithms to determine trading signals and execute trades with preset conditions.

What is leverage in forex?

In reality, the use of collateral in forex trading is not a strategy but a common method among market participants. Leverage in forex allows the investor to obtain greater exposure to currency pairs by paying a percentage of the total investment, called a guarantee. The guarantee percentages for this market are particularly low compared to others; They start at 3.3% with a maximum of 5%, therefore forex trading through leveraged products is very popular.

Influences on fx trading

There are several factors that play a role in this relationship and all together contribute in some way to the strength of one currency decreasing or improving relative to another. Understanding the influencing factors allows the trader to do an analysis that he can incorporate into his forex trading strategy.

Some of these factors include political stability, interest rates, trade relations, public debt, and public deficits. For example, in the case of interest rates, if the rates are higher, the borrowers perform better compared to what they would receive in a country with lower rates; therefore, higher rates attract more foreign capital, which will cause a rise in the exchange rate. This is one reason why forex traders should be aware of interest rate announcements from central banks such as the US Federal Reserve or the Bank of England.

The factors mentioned above can also cause the currency to fall. For example, the currency of a country with low inflation will generally rise as the country’s purchasing power is greater relative to other currencies. Even natural disasters, such as earthquakes or tsunamis, which unleash pressure on a nation’s economy, can have a negative impact on its currency. Political instability and poor economic performance can also have a negative impact. Politically stable countries with strong economic performance will always be more attractive to foreign investors, which is why these countries shift investment away from countries characterized by higher political or economic risk.

Furthermore, a country that shows a sharp decline in the economy will suffer a loss of confidence in its currency and capital will move to the currencies of more economically stable countries.

Traders have a lot to consider when developing their trading strategy and for this reason they choose to follow a forex economic calendar, for example, to keep up with forex news.

What are the risks?

Some of the possible risks of forex trading we discuss below:

  • There is a risk of closing positions. Market volatility and rapid price changes can cause your account balance to change rapidly, and if you do not have sufficient funds in your account to cover these situations, there is a risk that your positions will be automatically closed by the platform.
  • Financial markets are can be volatile and fluctuate rapidly and gapping is a risk that arises as a result. One of its effects could be that stop loss orders are executed at less favorable prices.

You can learn more about the risks of forex trading in our risk management guide.

Summary: forex meaning

Forex or currency trading is an exciting and fast option, and some traders focus solely on trading this market. They even choose to specialize in just a few currency pairs, spending a lot of time understanding the many economic and political factors that drive those currencies.