The foreign exchange market (shortened to FX or Forex) is similar to a big marketplace where nothing but currency is being traded. It’s believed that it began with the Babylonians, where goods were traded with other forms of goods, gold and silver were the closest two forms to our current currencies.
Forex is simply transferring a currency to another, and this process happens on an immense international level, with a turnover of 5 trillion USD of daily trade between governments, corporations, banks, and many others. The forex market never sleeps with transactions happening daily non-stop and without being restricted to business days or business hours.
The concept of trading anything for another is simple, but the intricate complexities involved in trading currencies worldwide with a huge number of entities can be overwhelming. We’ll be giving you a brief guide to help you come closer to understanding how the forex market works.
Currency Pair
Currency pair is one of the main building blocks in forex. You can know how the value of a currency fares against the other based on the price fluctuations of a pair. There may be countless pairs in the market, but the most popular traded pairs are those related to the biggest economies of the world.
Pairs can be categorized into 3 classifications: major, minor, and exotic. Majors are pairs composed of two currencies of the strongest economies with one of them being the USD; EUR, JPY, GBP, CHF, NZD, CAD, and AUD. Minor pairs are pairs that don’t include USD.
While exotic pairs are pairs that don’t belong to the major economies of the world. The most commonly traded pairs are major ones, due to their volatility and spread.
Bid and Ask
Bid and ask prices are the two main indicators of the supply and demand values of the market worldwide. It’s usually recommended to try bidding and asking and other techniques on a demo account, https://www.diamondfx.com can provide you with a demo account to try out trading without using actual money first.
Bid price means the price at which it’s likely to buy a currency while asking means the value where one would sell the said currency. Both values fluctuate constantly throughout the day. Usually, when you buy a currency, it means you’re buying it to sell it later at a higher value, in both the stock and forex markets it’s referred to as long trade. Going short or short trading means the opposite, to sell a currency while looking forward to it declining in value.
Leverage
Leverage is called a double-edged sword for a good reason. It’s the amount a broker provides a trader with, which considerably boosts the trade volume. A 1:20 leverage, for example, can push the worth of $1000 to $20,000. The maximum profit in this case would be 20 times the original amount entered; the maximum loss would be the same as well.
Forex trading isn’t incredibly hard to understand, but the strategies and techniques involved are too many and complex to be mastered in a few days. It’s definitely not a get-rich-quick scheme, it takes a considerable amount of time and effort to be able to make a constant profit and minimize loss.