what is the forex market

What is the Forex Market?

Forex stands for foreign exchange. The foreign exchange market is a global decentralized marketplace where traders exchange one currency in exchange for another. It has no central location, this market is operated under computer network.

Since investors (banks, businesses, investment firms) from all over the world are involved in this market, foreign exchange is considered as the largest financial asset market in the world. More than $6.5 trillion worth of trades is made in this market every day. This market is open 5 days a week (Monday to Friday) and 24 hours a day. However, Forex trading hours may vary in March, April, October and November, as different countries are implementing the Daylight Savings system at this time.

what is the forex market
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Types of Forex Market

There are three types of forex market

  1. Forex spot market
  2. Forward forex market
  3. Future forex market

Forex spot market

It is a kind of forex market where currency is traded on the spot. The transaction takes place as soon as possible or within a very short time after the two parties agree to exchange currency.

Forward Forex Market

A contract is made between the buyers and sellers to buy or sell a fixed amount of currency at a certain price in the future or a specified date.

Future Forex market

This market is similar to the forward market. But here the buyer or seller is legally obliged to buy or sell the currency at a fixed price in the future.

Related Article: How to Read Forex Charts

What is Forex Trading?

Speculators are usually engaged in this business. They buy currencies from one market and sell to another. Since this market is extremely volatile, Speculators hold the currency for a very short time. Whenever they see that the value of a currency has soared in a market, they sell their currency there make a profit from temporary difference.

Currency prices in the Forex market rise or fall for a variety of reasons, such as political, economic, technical, supply and demand, inflation rates, interest rates and terms of trade.

What is Online Forex Broker?

Online Forex Broker is an intermediary whose online platform allows you to trade in the Forex market. Online Forex Broker allows investors to use their platform for a certain amount of fee and offers a variety of trading tips that helps to investors to boost their profit.

They also offer leverage so you can manage large transactions even with a small deposit. But you have to keep in mind that profits and losses are magnified when trading with leverage.

Related Article: How to Spot a Forex Scam and How to Avoid It

Currency Pairs on the Forex Market

Since investors in the Forex market buy one currency and sell another at the same time, these currencies are listed as pairs.

Major Currency Pairs

As you can see from the name, major currency pairs are the most influential currencies in the Forex market. These currencies are the most traded which accounts for 80% of the total daily Forex trading. The liquidity of these currencies is very high due to which the spreads are less. Since these currencies are associated with developed and sustainable economies, their volatility is less.

Major currency Pairs includes EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD and NZD/USD

Cross currency pairs

Currency pairs that do not include US currency are called cross currency pairs. Earlier these currencies were usually converted to US currency before the transaction and then to the currency of particular country, but now these currencies are exchanged directly among themselves.

Some cross currency examples are EUR / GBP, EUR / CHF, and EUR / JPY.

Exotic currency pairs

When the currency of a developed country is paired with the currency of a developing country, it is called exotic currency pairs. Exotic currency is much more volatile and risky as the economy of developing countries is not very sustainable. Examples of some Exotic currency pairs are USD / PLN, GBP / MXN and EUR / CZK.

Regional Currency Pairs

These currency pairs are traded between countries in specific regions such as EUR / NOK, AUD / NZD and AUS / SGD.

base and quote currency
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Base currency (the transaction currency)

The first currency of pair quotation is deemed base currency. The base currency is bought and sold in exchange for the quote currency.

Quote currency

The second currency of pair quotation that means the right currency is called Quote currency. In the picture you can see that the USD is Quote currency and observe how much Quote currency you can exchange for 1 unit base currency.

Bid Price

The price at which an investor is willing to sell a currency is called the bid price. The bid price is usually on the left side of the quote.

Ask Price

The price at which a buyer agrees to buy a currency is called the ask price.

Spread

The difference between bid price and ask price is called spread. If you subtract the bid price from asking price, you will get spread. For example, if the ask price is 1.0918 and the bid price is 1.0916, then spread will be (1.0918-1.0916) = 0.0002

Pips (point in percentage)

It measures the change in value between two currencies.

Related Article: Most Appealing Benefits of Forex Trading

How does Forex trading work?

Forex trading is not a very complicated matter. You can easily invest in this market, if you have a smartphone or computer and internet connection.

There are several ways through which you can start forex trading. Previously, most investors bought and sold currencies through conventional forex brokers. But now online trading provider has brought a groundbreaking change in forex market. Using this fully computerized system you can buy and sell currencies in the Forex market from anywhere in the world.

You need to open an online broker account to trade in the Forex market. After opening an account, you need to deposit some money with which you will cover the trading cost. This is called a margin account. After opening the account you will be able to start trading in the forex market. But before you start trading, you must know the market very well. Success in this market does not come overnight. The more you know, the more successful you will be.

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