Title: Understanding the Forex Market: A Beginner’s Guide
Based on content originally presented by Rayner Teo
Source: “What is Forex and How Does it Work (Learn Forex in 3 Minutes)” – Rayner Teo, YouTube
The foreign exchange market, more commonly known as Forex or FX, is a global marketplace for exchanging national currencies. With an average daily trading volume exceeding $6 trillion, it is the most liquid and one of the largest financial markets in the world. The purpose of this article is to break down the key concepts of Forex trading based on insights shared by Rayner Teo in his video tutorial. We will explore what the Forex market is, how it operates, who participates in it, and how beginners can get started.
What is Forex?
Forex stands for “foreign exchange” and refers to the process of buying one currency while simultaneously selling another. This trading usually takes place over the counter rather than on centralized exchanges, and it operates 24 hours a day, five days a week due to its global nature.
At its core, Forex trading reflects the relative value of one currency compared to another. Currencies are always quoted in pairs, such as EUR/USD (euro versus U.S. dollar) or GBP/JPY (British pound versus Japanese yen). When you trade Forex, you are speculating on the rise or fall in the value of one currency against another.
How the Forex Market Works
Forex trading is decentralized and functions through a global network of computers, brokers, and financial institutions rather than a central physical location. This decentralized nature allows for a higher level of market fluidity and flexibility.
Key characteristics of how the Forex market operates:
– It is open 24 hours a day from Sunday evening to Friday evening, reflecting the global nature of commerce and finance.
– The market consists of several major financial centers, including London, New York, Tokyo, and Sydney.
– The continuous operation through these overlapping time zones enables traders from all over the world to engage at all times.
Structure of the Forex Market
Rayner Teo emphasizes that the Forex market is composed of several tiers that influence how trading is conducted:
1. Interbank Market:
– The top level, where major banks exchange currencies directly with one another.
– These transactions involve extremely large volumes.
– Prices are generally better due to the high volume and low risk between the institutions.
2. Electronic Broking Services (EBS) or Reuters Dealing:
– Platforms that cater to banks and large institutions.
– Act as intermediaries by providing price feeds and facilitating trades.
3. Retail Market:
– This includes individual traders like you and me.
– We access the market through brokers who provide leveraged accounts to enhance trading capabilities.
– Prices offered here generally reflect interbank rates with a small markup known as the spread.
Currency Pairs and How They Work
Forex is always traded in pairs. Understanding how these pairs work is crucial to being a successful trader.
There are three main types of currency pairs:
– Major Pairs:
These include the most traded currencies in the world and always have the U.S. dollar on one side of the pair. Examples:
– EUR/USD
– USD/JPY
– GBP/USD
– USD/CHF
– AUD/USD
– USD/CAD
– Minor Pairs:
These pairs do not include the U.S. dollar but involve other major currencies. Examples:
– EUR/GBP
– EUR/AUD
– GBP/JPY
– Exotic Pairs:
These involve one major currency and one currency from an emerging or smaller economy. Examples:
– USD/SGD
– EUR/TRY
– GBP/THB
Understanding Bid, Ask and Spread
Every Forex quote involves two prices:
– The Bid: the price at which the broker is willing to buy the base currency.
– The Ask: the price
Read more on EUR/USD trading.