Title: Forex Trading Basics: Understanding the Largest Financial Market
Originally published by Bitget Academy | Source: https://www.bitget.com/news/detail/12560604908115
Foreign exchange, commonly known as Forex or FX, is the global marketplace for trading national currencies against one another. As the largest and most liquid financial market in the world, Forex trading plays a critical role in global commerce and finance, influencing everything from travel expenses to multinational corporate operations. With more than $7.5 trillion traded daily as of 2022, according to the Bank for International Settlements, understanding how Forex operates is essential for both new traders and seasoned investors.
This guide delves into the fundamentals of Forex trading, including how it works, who participates, why it’s important, and strategies to get started.
What Is Forex?
Forex, short for foreign exchange, is the buying and selling of currencies with the aim of making a profit or hedging risk. Currency trading involves pairs, where one currency is exchanged for another, such as EUR/USD (euro versus US dollar).
Since currencies are the foundation of international trade, Forex trading is not only essential to individual investors but also indispensable to entities such as multinational corporations, central banks, governments, and financial institutions.
What Makes Forex Unique?
Forex differs from other financial markets due to key characteristics that make it extremely attractive for retail and institutional investors:
– High liquidity: The Forex market sees over $7.5 trillion traded daily, offering incredible access and fast order execution.
– 24/5 operation: Forex trading takes place 24 hours a day, five days a week, across major financial centers around the world, unlike stock markets which have fixed trading hours.
– Accessibility: With the rise of digital platforms and online brokers, almost anyone with an internet connection and a trading account can participate in Forex.
– Leverage: Brokers often offer significant leverage—sometimes up to 1:500—allowing traders to control larger positions with a smaller initial investment.
– Volatility: Real-time economic events, political developments, and monetary policy decisions contribute to price fluctuations, creating profit opportunities.
How Does the Forex Market Work?
Forex trading takes place over the counter (OTC), meaning transactions are decentralized and conducted electronically via broker networks or financial institutions. No centralized exchange handles Forex transactions, unlike stocks or futures.
Participants trade two currencies simultaneously, buying one and selling the other. For example, in the EUR/USD pair:
– EUR is the base currency.
– USD is the quote currency.
If you believe the euro will strengthen against the dollar, you would buy (go long) the pair. Conversely, if you think the euro will weaken, you would sell (short) the pair.
Major Currency Pairs
Among the nearly 180 recognized currencies worldwide, a handful dominate global Forex trading. The following are some of the most heavily traded currency pairs:
– EUR/USD: Euro and US dollar
– USD/JPY: US dollar and Japanese yen
– GBP/USD: British pound and US dollar
– USD/CHF: US dollar and Swiss franc
– AUD/USD: Australian dollar and US dollar
– USD/CAD: US dollar and Canadian dollar
– NZD/USD: New Zealand dollar and US dollar
These major pairs account for around 85 percent of daily trading volume. They are favored for their liquidity, tighter spreads, and abundance of economic data.
Who Participates in the Forex Market?
Several key entities drive the Forex market, each with distinct motivations and volumes:
Central Banks
Central banks (such as the Federal Reserve, European Central Bank, and Bank of Japan) play a crucial role by setting interest rates and implementing monetary policy. Their interventions, whether to stabilize a currency or combat inflation, often lead to significant volatility.
Governments
Government agencies trade currencies for various reasons, including debt payments, foreign aid, or managing foreign reserves. These trades can also affect currency demand and supply.
Commercial Banks
Large financial institutions execute transactions on behalf
Read more on EUR/USD trading.