**Forex Trading Fundamentals: A Comprehensive Guide**
Original Author: Trading Channel (as presented in the linked video)
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**Introduction to Forex Trading**
The Foreign Exchange Market, more commonly referred to as Forex or FX, is the largest and most liquid financial market in the world. Daily, it sees over $6 trillion in transactions, dwarfing the trading volume of any other financial market, including stocks and commodities. Forex trading involves buying one currency and selling another simultaneously, taking advantage of fluctuating exchange rates to make a profit.
This extensive guide covers the essentials of Forex trading, including market participants, how the market operates, factors affecting currency prices, trading strategies, and risk management.
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**What is Forex?**
– Forex stands for “foreign exchange.”
– Involves the exchange of one country’s currency for another.
– Trading is conducted in currency pairs (such as EUR/USD, GBP/JPY).
– The objective is to profit from changes in currency values relative to each other.
– The market operates 24 hours a day, five days a week, due to major financial centers being located in different time zones: London, New York, Tokyo, and Sydney.
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**How the Forex Market Works**
– Forex is a decentralized, over-the-counter (OTC) market, meaning it does not have a physical location or a central exchange.
– Trading occurs electronically through computer networks between traders worldwide.
– The primary participants are banks, financial institutions, corporations, governments, and retail traders.
**Who Participates in Forex Trading?**
1. **Central Banks and Governments**
– Intervene in the currency markets to control money supply, inflation, and interest rates.
– May buy or sell currencies to stabilize or increase the competitiveness of their national currency.
2. **Commercial Banks and Financial Institutions**
– Conduct large volumes of currency trading for clients and themselves.
– Major banks act as market makers, providing liquidity to the market.
3. **Corporations**
– Multinational companies participate in the Forex market to pay for goods and services or to hedge against currency risk.
4. **Retail Traders**
– Individuals trading through online brokers.
– Now constitute a significant and growing segment in the Forex market.
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**Currency Pairs and Quotes**
Forex trading revolves around currency pairs, divided into:
– **Major pairs**: Most traded and always include USD (e.g., EUR/USD, GBP/USD).
– **Minor pairs**: Do not include USD but include other major currencies (e.g., EUR/GBP, EUR/AUD).
– **Exotic pairs**: Combine a major currency with a currency from an emerging or smaller economy (e.g., USD/TRY, USD/SEK).
Currencies are quoted in pairs because you are buying one while selling another, for example:
– If EUR/USD is quoted at 1.1500, one euro buys 1.15 US dollars.
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**Bid, Ask, and Spread**
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Read more on AUD/USD trading.