Forex Basics Explained
Knowing the vocabulary used by investors and Forex brokers will not make you a successful trader, but it is necessary to know this in order to become a trader in the beginning.
Here are some of the most important Forex basics:
- Currency pairs
- Spreads and points
- Margin
- Leverage
- Lot size
- Trading platforms
- CFDs
- Swap
Any investor who wants to start trading in the Forex market needs to understand how this market works, and he needs to know the basic terms used in this particular market. Starting with a demo trading account is a good way to learn and understand what is Forex.
Forex Explanation - What are Forex Quotes?
To understand what Forex is, it is necessary to understand how currency pairs work before going any further. For example, let's take the EUR / USD pair. The euro is called the base currency (or transaction currency) and the US dollar is the counter currency. It gives us a balance of power between the base currency and the counter currency of the exchange rate.
When looking at EURUSD or other currency pairs on the trading platform in the red box, we can see two prices: Sell and Ask. It is usually displayed as follows: EURUSD 1.1034 / 1.1035. The asking price indicates that we can buy 1 € at $ 1.1035.
In parallel, the offer price indicates to us that we can sell 1 euro for $ 1.1034. It is easy to tell that banks usually sell higher currencies than they do. And they are able to do this because they have more influence from intermediaries.
You cannot just buy or sell EURUSD, as is the case with company stocks for example. The EURUSD currency pair does not already exist. To better illustrate this concept, you cannot buy any commodity in EURUSD; it is not a currency but a currency pair whose rates are linked to determine the relative value of their home. Therefore, traders trade the strength of currencies against each other, by buying and selling different currency pairs, following their price movements.
In the Forex market, profits are achieved by increasing or decreasing the value of a currency in relation to another currency. Suppose you buy the euro and sell the US dollar (via the EURUSD pair). To make a profit from this Forex deal, you will have to wait for the euro to rise against the US dollar.
What are the most popular Forex pairs?
In order for the Forex explanation article to be completely complete, we need to review the most popular instruments or currencies that traders have access to.
The most common currencies are the euro (EUR), the US dollar (USD), the Japanese yen (JPY), the British pound (GBP) and the Swiss franc (CHF). Hence, the most popular currency pairs (also known as the major currencies) are the most widely used. The most commonly traded currencies are: EURUSD, GBPUSD, USDJPY, and USDCHF.
There are three other very frequent Forex currencies: New Zealand Dollar (NZD), Australian Dollar (AUD) and Canadian Dollar (CAD). When pegged to other currencies in a pair, they are categorized as “crosses”: NZDCAD, USDCAD, or AUDUSD.
All currency pairs that include the Russian ruble, the Czech koruna, the Polish zloty, the Hungarian forint, the Swedish krona, or the Norwegian krona are "exotic" pairs. They only represent 10% of the currency exchange market.
Forex Explanation - What are Forex CFDs?
If you have ever wondered what is Forex, and have done research on forex trading for beginners, you may have seen the term "Forex Difference" at some point. There are two ways to trade forex: using CFDs or spot forex (also known as margin). Spot Forex includes buying and selling the actual currency. For example, you can buy a certain amount of sterling against the euro, and then, once the value of the pound has increased, you can then exchange the euro with the pound again, and receive more money compared to what you originally spent on the purchase.
CFD stands for "Contract For Difference", a contract used to represent movement in the prices of financial instruments. In Forex terms, this means that instead of buying and selling large amounts of currency, you can benefit from price movements without owning the same asset. Along with Forex, CFDs are also available on stocks, indices, bonds, commodities and cryptocurrencies. In any case, CFDs allow you to trade the price movements of these instruments without having to buy them.
Who trades in the Forex market?
The most important Forex traders and investors are:
- Central banks
- Governments
- Private banks
- Hedge fund investors
- ETF investors
- Brokers
Beginner Traders, Professionals, and Investors
Among all forex traders, central banks have the most influence on Forex prices. Indeed, their policies (quantitative easing) and decisions (interest rates) are regulated by the "supply" of the currency and take responsibility for it.
Beginner traders and investors have only a limited impact on the Forex market, given the amount invested compared to the total sums of trillions of dollars found.
To understand the Forex market, one must know that the supply and demand for currencies is constantly evolving. Traders can track price development through trading platforms using Japanese candles or charts.