What is Forex? The basics of the forex market


9 min read

The Forex market, or simply FX (acronym for "foreign exchange"), is the largest and most liquid financial market in the world, which allows traders to buy a currency by paying its value in other. When you buy a currency, assume that your exchange rate with respect to other currencies will increase and you can sell it at a higher price. This type of speculation is the basic principle of trading in the Forex market.

 Forex trading basics Overview of the Forex trading interface

Volume and liquidity

The New York Stock Exchange is the largest stock exchange in the world. It operates a daily volume of 22.4 billion dollars. The Forex market can reach a volume of 5.3 trillion dollars a day. Forex is not only 200 times larger than the largest stock exchange in the world, but it is also extremely volatile. Exchange rates fluctuate constantly, creating numerous speculative opportunities. High liquidity means that it is easy to buy and sell currencies.

What is traded in the Forex market?

The answer is "money" or, more precisely, the national currencies of different countries. In the exchange market, all currencies are traded in pairs. Opening an operation in the Forex market, we buy the currency of a country and at the same time we sell the currency of another country.

The most popular currencies in Forex are the US dollar (USD), Canadian dollar (CAD), euro (EUR) ), Pound sterling (GBP), Swiss franc (CHF), New Zealand dollar (NZD), Australian dollar (AUD) and Japanese yen (JPY). Currency pairs that do not contain the dollar (USD) are called "currency crosses."

The major currency pairs represent 95% of the volume of world trade

The Forex market is open 24 hours a day during the week from 0:00 GMT on Monday to 21:00 GMT on Friday.

Currency quotes

A quote is the last market price, agreed between the buyer and the seller. It consists of the bid price (ask) with which the asset is purchased, and the demand price (bid) with which the asset is sold to other traders. The difference between the two is called "spread."

Bid = Sales price

Ask = Purchase price

Spread = The difference between the offer price and the demand price, the commission charged by the broker to carry out an order.

Use of multiplier

Daily fluctuations of exchange rates for currency pairs rarely exceed 1%. This means that if you are trading small volumes of the underlying asset, the result will be proportionally modest. One of the possible ways to make trading in Forex economically more solid is to apply a multiplier to the amount of your investment. The multiplier is an investment tool that allows the client to operate large volumes of currency without the need to invest the total amount needed.

 Multiplier x300 Multiplier options

Using a multiplier of x300, you can make an investment three hundred times more than what you have at your disposal. In this case, any profit you get (or the losses you can incur) will be multiplied by three hundred as well.

Loss Limit (Stop Loss) and Profit (Take Profit)

The main currency pairs fluctuate enough to offer good profit opportunities to professional traders. However, spending a lot of time passively observing open positions, waiting for the opportunity to close them, is not effective from the point of view of the time invested, nor physically possible, at least in some cases. The IQ Option platform offers an opportunity to close profitable or loss positions automatically when the cost reaches a certain level.

 Stop loss

All you need to do is set the desired level of profit / loss that will close the position.

What makes currencies fluctuate?

Currencies fluctuate depending on supply and demand. The increase in demand for the US dollar, if no other factor varies, will increase your exchange rate. An increased offer in turn will reduce the exchange rate.

What are the main factors that affect the demand and supply of different currencies? The possible reasons include but are not limited to monetary policy, carried out by the central bank of the respective country, the inflation rate and the political and economic conditions. Regular economic reports such as labor data, changes in the gross domestic product and the interest rate can have a huge effect on fluctuations in the exchange rate. Irregular macroeconomic events such as Brexit may also affect the foreign exchange market.

 forex pair volatility The volatility peaks coincide with the main economic events

Conclusion

The most liquid and largest market in the world opens a world of possibilities for individual traders. However, it is important to remember that Forex trading involves a high degree of risk and should be done only by people prepared to devote time and effort to study the complexities of currency trading.

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Any reference to movements or historical price levels is informative and is based on external analysis and we do not guarantee that such movements or levels can happen again in the future

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Source: IQOption blog (blog.iqoption.com)

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