Foreign exchange (popularly known as FX or forex) is a term that refers to a worldwide, over-the-counter market, whereby banks, institutions, investors, and traders sell, buy, and speculate on world currencies. It is normally conducted through an online channel referred to as interbank market in which currencies of various types are traded 24 hours in a day and five days a week. It is among the largest trading markets on the globe with a very high daily turnover.
Currency Pairs
Every transaction that is made on the forex market usually involves the simultaneous selling and purchasing of 2 currencies. These currency pairs comprise a quote and base currency.
Major Pairs
These are pairs that are commonly traded and makeup close to 80% of the trade volume on the forex market. The major currency pairs typically exhibit high liquidity and low volatility. They are normally associated with economies that are well-managed and stable, thus, not easily susceptible.
Major pairs are characterized by smaller spreads compared to others. There are a total of seven major currency pairs on the global forex market.
Cross Currency Pairs
Crosses is a term that is used to refer to pairs that exclude the USD. They are currently being offered for a direct exchange, but initially had to be first converted to USD then the desired currency. Cross currencies that are commonly traded are normally derived from the minor currencies, such as GBP/JPY, EUR/JPY, EUR/GBP. These pairs are more volatile and less liquid compared to major currency pairs.
Exotic Pairs
These are currencies from smaller or emerging economies that are paired with a major. They are typically riskier to trade because they are highly susceptible to manipulation, more volatile, and less liquid. Exotics have wider spreads and are very sensitive to a sudden shift in financial and political developments.
How it Works
Forex trading is the process of buying and selling currencies with the purpose of making a profit. The price of a single currency is usually linked to that of another in trades, and this means that at any one time, you will work with two currencies.
The base currency refers to the currency that appears first on any pair quotation. It is followed by the quote currency. Where one’s loss or profit sits is the difference in price between the two currencies.
How to Start
Forex trading is not difficult, and it just requires you to find a regulated broker that has a good track record of, at least, five years. Any broker who follows regulation rules is always legitimate. After setting up an active account, trading can commence but you will be required to make deposits that cover all costs of your trades. Click Here to read more about beginners trading forex.
Orders
There is a total of four common types of orders, and these are as follows:
• Stop loss order
• Stop order
• Limit order
• Market order
All of these have their pros and cons and will need some getting used to understand them well.
Advantages
Trading Forex is generally associated with numerous benefits, and the main ones include the following:
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High Liquidity
Forex is considered to be the largest market on the globe. This is beneficial because an individual can easily enter as well as exit positions with minimal slippage.
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Low Transaction Cost
There is no transaction cost charged by brokers as is the case with stocks. Traders only pay for the spread.
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Flexible
Forex Trading exhibits very high flexibility because one can trade whenever and wherever they please. This is because it is open 24/5 as earlier mentioned.
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Better Risk Management
It allows for micro lots trades that enable you to manage your risk better. Forex trading lacks gaps, and this means that individuals will seldom lose more than they intend to.
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Low Barrier Entry
A majority of Forex brokers allow people to open forex accounts with …