Credit: This article is based on content originally published by Ruby on Bitget News.
Title: Understanding Forex Trading: A Comprehensive Guide to the World’s Largest Financial Market
The foreign exchange market, commonly known as Forex or FX, is the largest and most liquid financial market in the world. Daily trading volumes exceed $7 trillion, far surpassing stock or commodity markets. Forex trading involves the exchange of one currency for another, with traders seeking to profit from changes in currency values. This guide provides an in-depth look at how Forex trading works, the key principles and participants involved, and what makes the market unique.
What Is Forex Trading?
Forex trading refers to the process of buying and selling currencies in pairs. When traders engage in Forex, they speculate on the movements of currency exchange rates, aiming to profit from price fluctuations. Currencies are always traded in pairs, such as EUR/USD (Euro/US Dollar), which expresses the value of one currency in terms of another.
Major currency pairs include:
– EUR/USD (Euro/US Dollar)
– USD/JPY (US Dollar/Japanese Yen)
– GBP/USD (British Pound/US Dollar)
– AUD/USD (Australian Dollar/US Dollar)
– USD/CHF (US Dollar/Swiss Franc)
– USD/CAD (US Dollar/Canadian Dollar)
– NZD/USD (New Zealand Dollar/US Dollar)
These pairs are the most traded globally and typically have the highest liquidity.
How Forex Trading Works
Unlike traditional exchanges with a central location, the Forex market operates over-the-counter (OTC). This means trades are executed electronically through a network of banks, brokers, institutions, and individual traders around the world.
The Forex market is open 24 hours a day, five days a week, thanks to the different time zones of global trading centers including:
– Sydney
– Tokyo
– London
– New York
Each session overlaps with others during specific periods, particularly the London/New York session, which results in the highest levels of liquidity and volatility.
Understanding Currency Pairs
Currency pairs in the Forex market are categorized as:
– Major pairs: The seven most traded pairs that include the US Dollar
– Minor pairs: Include major currencies but exclude the US Dollar, such as EUR/GBP or GBP/JPY
– Exotic pairs: Consist of one major currency and one currency from an emerging economy, like USD/TRY or USD/ZAR
In a currency pair, the first currency is the base, and the second is the quote. A EUR/USD exchange rate of 1.10 means one Euro is worth 1.10 US Dollars.
The profit or loss from a trade depends on how the exchange rate moves after the position is opened. When you buy EUR/USD, you’re buying Euros and selling US Dollars, speculating that the Euro will appreciate relative to the Dollar.
Key Concepts in Forex Trading
To understand Forex, it is essential to grasp several core concepts:
1. Leverage and Margin
– Leverage allows traders to control a large position with a relatively small amount of capital. A common leverage ratio is 100:1, meaning a $1,000 margin can control a $100,000 position.
– Margin is the capital a trader must maintain to open and sustain leveraged positions. While leverage can amplify profits, it also increases risk.
2. Pips and Points
– A pip (percentage in point) is the smallest price change a currency pair can move. For most pairs, one pip equals 0.0001. For JPY-related pairs, it’s 0.01.
– Points may be used to describe 10-pip movements in casual trading contexts, though pips remain the standard unit of measurement.
3. Bid and Ask Price
– The bid price is the highest price a buyer is willing to pay for a currency.
– The ask price is the lowest price a seller is willing to accept.
– The spread is the difference between these two and represents a broker’s profit
Read more on EUR/USD trading.