Forex Basics

Forex trading grows popular thanks to tech advances. This guide covers the basics for traders. In the past, only big banks and rich people could trade forex. Now the internet opens it to investors everywhere. For new traders, this explains key steps before you start online trading.

What is the Structure of the Market?

Unlike equity markets which trade via a singular central location such as a stock exchange, the foreign exchange market operates on an Over The Counter (OTC) basis. This structure means no single exchange hub exists: instead, forex trading flows through an interconnected system comprising major global banks, commonly referred to as the interbank network.

Market is the largest financial trading market in the world that trades $7.2 trillion every day. Forex is also the most liquid market in the world, meaning that a trader can place a trade in the market at any time of the day or night because there are always other traders willing to exchange their currency. FX is open 24 hrs a day and it opens on Sunday at 5 PM EST to 5PM EST on Friday.

All trades in the market are based on contracts, which are agreements made between traders, and these contracts use money to settle.

Trading Currency Pairs in the Market

The market serves as a platform where one currency is exchanged for another to facilitate international trade.

Conversely, individuals involved in currency trading engage in buying and selling monetary assets primarily for speculative profit. The vast majority, 95%, of all market participants consist of retail investors and retail traders.

Given that forex trading involves the exchange of one currency for another, currencies are inherently traded in sets of two, for example, the Euro is exchanged against the US Dollar via the EURUSD forex currency pair.

Currencies trade in pairs. Buying one means selling the other at the same time. Take EURUSD: buying it gets you EUR while you sell USD.

Most Traded Currency Pairs in Forex

The 4 most liquid pairs in the market are:

1.EURUSD - Euro versus US Dollar

2.USDJPY - US Dollar versus Japanese Yen

3.GBPUSD - British pound versus US Dollar

4.USDCHF - US Dollar versus Swiss franc

These four pairs see the most action. Many traders stick to just these four.

FX Currency Quotes and Pips

Forex currency pairs are shown using a format called a currency quote. For example, the EURUSD currency quote will be shown as something like 1.2500. This is the price for exchanging one EURO for a certain amount of US Dollars. The currency quote of 1.2500 means that you can exchange 1 EURO for 1.2500 US Dollars.

The smallest movement in a currency pair's exchange rate is referred to as a pip. For instance, if EURUSD moves from 1.2500 to 1.2501, it has experienced a one pip change.

Pips are used to calculate trading profits. For instance, gaining 10 or 20 pips in a trade translates into monetary profits based on pip value. This serves as a fundamental measure of trade performance for traders.

Brokers

Brokers connect retail traders and investors to the online trading market. Traders must trade the online currency exchange market through brokers. Brokers provide traders with accounts that traders can use to the market. Traders will just login to the trading software that they will download from their broker using their account and they can then place trade positions on the online trading from their account.

Brokers furnish traders with leverage, enabling them to access capital they can borrow, thus facilitating the opening of contracts denominated in 100,000 currency units, commonly known as standard lots or standard contracts.

Because most retail traders can't afford this amount of money, brokers provide these retail traders with leverage. Leverage option of 100:1 which is the most often used leverage in forex means that traders can borrow from their brokers up to 100 times what they have as their capital, henceforth if a trader has $1,000 capital in their account they can borrow up to 100 times this amount which means $1,000 multiplied by 100 is equal to $100,000 and using this leverage a trader with only $1,000 capital can now be able to trade 1 standard lot of 100,000 units of currency.

This capacity for leverage, allowing traders to operate positions many times larger than their deposited capital by borrowing the remainder, is precisely what makes forex appealing to both novice and seasoned investors.

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