Original article by Pedro Solé, published on Bitget News: https://www.bitget.com/news/detail/12560605137384
Title: Forex Trading Explained: An In-Depth Guide to the Global Foreign Exchange Market
Forex, short for “foreign exchange,” refers to the global marketplace where national currencies are traded. It stands as the largest and most liquid financial market in the world, with a daily trading volume exceeding $7 trillion. This vibrant and dynamic market operates 24 hours a day, five days a week, connecting traders across continents in a decentralized network.
This in-depth guide explores how the forex market operates, the key players involved, currency pairs, trading strategies, and the risks and benefits associated with forex trading.
What Is Forex Trading?
The foreign exchange market is a global decentralized platform where individuals, institutions, and governments buy and sell currencies. Unlike centralized exchanges like stock markets, the forex market is predominantly over-the-counter (OTC), which means trades are executed directly between parties, often through electronic trading networks. The primary goal in forex trading is to profit from price movements between currency pairs by buying low and selling high or vice versa.
Historical Background
– The modern forex market emerged after the collapse of the Bretton Woods system in the early 1970s.
– Before this, most currency values were tied to gold or the US dollar under a fixed exchange rate system.
– After 1971, countries shifted to a floating exchange rate system, allowing currencies to be valued relative to supply and demand in the market.
– Technological advancements and deregulation further accelerated the rise of the forex market, enabling online trading platforms and real-time order execution.
Structure of the Forex Market
Forex is not centralized in a physical exchange. It operates through an interconnected network of:
– Central Banks
– Commercial Banks
– Investment Banks
– Hedge Funds
– Multinational Corporations
– Retail Traders
This global network is divided into three primary sections:
1. The Interbank Market
– Consists of large financial institutions and central banks.
– These entities trade massive volumes to manage currencies, hedge risk, or influence national economic policies.
2. The Over-the-Counter (OTC) Market
– Includes brokerage firms and individual investors.
– Trades are executed electronically via broker platforms.
3. The Derivatives Market
– Encompasses currency futures, options, and contracts for difference (CFDs) offered on financial exchanges.
Major Forex Trading Hubs
Since forex operates globally, there are key trading centers in various regions. These centers create what’s known as the “forex trading session,” segmented by geography:
– Sydney (Asia-Pacific session)
– Tokyo (Asia session)
– London (European session)
– New York (North American session)
Forex trading usually becomes more volatile and offers greater liquidity when these sessions overlap, particularly the London/New York overlap.
Understanding Currency Pairs
Forex trades involve currency pairs, where one currency is exchanged for another. Each pair has a “base” currency and a “quote” currency.
Example: EUR/USD = 1.1200
Here, EUR is the base currency, while USD is the quote currency. This means 1 Euro is equal to 1.1200 US Dollars.
Currency Pairs Classification:
– Major Pairs: Most traded and always include the US Dollar. Examples include EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
– Minor Pairs (Crosses): Do not involve the USD but include major currencies such as EUR/GBP or AUD/NZD.
– Exotic Pairs: Combine a major currency with a currency from a developing or emerging economy. Examples: USD/TRY, EUR/THB.
Forex Lot Sizes
A “lot” is a unit measuring the amount of a currency being traded. Traders can choose between:
– Standard Lot: 100,000 units
– Mini Lot: 10,000 units
– Micro
Explore this further here: USD/JPY trading.