**Understanding Forex Trading: A Comprehensive Guide**
*Inspired by the tutorial by WhiteBoard Finance and supplemented by expert insights from Investopedia and Babypips.*
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The foreign exchange market, commonly referred to as Forex or FX, is the world’s largest and most liquid financial market. It facilitates the exchange of currencies, allowing participants to buy, sell, and speculate on the value of different currency pairs. Forex trading has grown in popularity among individual traders due to advances in technology, high liquidity, and the potential for profit. This guide will walk you through the basics of Forex trading, the mechanics of how the market works, essential concepts, and strategies to get started, capturing insights from WhiteBoard Finance’s educational content and other reputable sources.
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### What is Forex?
– **Definition:** Forex trading is the act of buying one currency while simultaneously selling another. Currencies are traded in pairs, such as EUR/USD or GBP/JPY, with the value of one being quoted relative to the other.
– **Market Scope:** With a daily trading volume exceeding $6 trillion (as of 2021, BIS), the Forex market dwarfs other financial markets.
– **Participants:**
– Central banks
– Commercial banks
– Hedge funds
– Corporations
– Retail traders
– **Trading Hours:** Forex operates 24 hours a day, five days a week, allowing for global participation and flexibility for traders.
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### How the Forex Market Works
– **Decentralized Market:** Forex is not traded on a centralized exchange. Trading occurs over-the-counter (OTC) directly between parties, typically via electronic platforms or phone networks.
– **Currency Pairs:**
– *Major pairs* (involving the US Dollar and most traded): EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, NZD/USD
– *Minor pairs* (popular pairs that don’t involve the USD): EUR/GBP, EUR/AUD, GBP/JPY
– *Exotic pairs* (involving emerging economies): USD/TRY, USD/SEK
– **Quotes:**
– The price of a currency pair reflects how much of the quote currency is needed to buy one unit of the base currency.
– For EUR/USD at 1.2000, it takes 1.2 US dollars to purchase one Euro.
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### Key Terminology in Forex Trading
– **Pip:** The smallest price movement in a currency pair, typically 0.0001 for most major pairs (except pairs involving JPY, where it’s 0.01).
– **Spread:** The difference between the bid (buy) and ask (sell) price, representing broker commission.
– **Leverage:** Allows traders to control large positions with a smaller amount of capital. Typical leverage ratios range from 30:1 to 100:1, depending on the broker and jurisdiction.
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Read more on AUD/USD trading.