**Understanding Forex Trading: From Basics to Profitable Strategies**
*Adapted and expanded from information presented by Trading PH (YouTube video: What is Forex? How to Trade Forex Philippines) and complemented with insights from Investopedia.*
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Forex trading, short for foreign exchange trading, is the process of buying and selling currencies with the aim of achieving a profit. Operating as the largest and most liquid market in the world, the forex market has a daily trading volume exceeding $6 trillion, according to the latest Bank for International Settlements (BIS) data. Understanding how forex works and the vital components of trading is necessary for anyone hoping to succeed in the field.
## What is Forex?
– Forex (foreign exchange) involves exchanging one currency for another at a designated price, usually to speculate on future currency price movements.
– Trading happens in currency pairs, where one currency is exchanged for another. For example, in the USD/JPY pair, USD is the base currency and JPY is the quote currency.
– Forex operates 24 hours a day during the business week due to its global, decentralized nature. Major forex centers include London, New York, Tokyo, and Sydney.
## Who Participates in Forex?
– **Central Banks:** Influence currency value through monetary policy.
– **Commercial Banks:** Facilitate most of the trading for clients and their own accounts.
– **Financial Institutions and Hedge Funds:** Engage in large-scale speculations.
– **Corporations:** Use forex to hedge against international exposure and currency risk.
– **Retail Traders:** Individual speculators using online broker platforms.
## Why Trade Forex?
– **High Liquidity:** With a significant volume of daily trading activity, assets can be quickly bought or sold.
– **Accessibility:** Open 24/5, allowing traders to operate at almost any hour.
– **Leverage:** Allows traders to control large positions with a relatively small investment (margin).
– **Low Transaction Costs:** Generally lower spreads compared to other markets.
– **Profit in Rising or Falling Markets:** Ability to take both long and short positions.
## Understanding Currency Pairs
Currency pairs are quoted as two currencies:
1. **Major Pairs:** Pairs involving USD and other major currencies such as EUR, GBP, JPY, AUD, and CAD. Examples include EUR/USD, USD/JPY.
2. **Cross Pairs:** Pairs that do not involve the USD, such as EUR/GBP or GBP/JPY.
3. **Exotic Pairs:** Pairs involving a major currency and a currency from an emerging economy, for example, USD/TRY.
Each quote consists of two prices:
– **Bid Price:** The price at which the market is willing to buy the base currency.
– **Ask Price:** The price at which the market will sell the base currency.
– The difference between these two is called the **spread**, which is one of the main sources of profit for forex brokers.
## How Forex Trading Works
### Price Movements
Read more on AUD/USD trading.