Forex Market Basics
The Forex (short for "Foreign Exchange") market is where currencies are bought and sold, it is the biggest market in the world with over 3 trillion USD worth of trades conducted daily.
Using our advanced platform you too can trade in the forex market 24 hours a day, five days a week. It is an exciting market with currency values changing constantly in accordance with supply and demand levels.
Currency Is the Product Traded
In the forex market the product traded is currency, one currency is used to buy another and so in every trade a pair of currencies is involved, there are over 100 such possible pairs. Although any currency used somewhere on the globe may be traded there are several currencies which play major roles in forex trading. Among these are the U.S dollar (USD), Euro (EU), Japanese yen (JPY), Swiss franc (CHF), British pound (GBP), Canadian dollar (CAD), Australian dollar (AUD) and the Chinese yuan (CNY). The USD is involved in most forex trades, it is either the base currency (the one used to pay with) or the target currency (the one being bought).
Speculative Trading for Profit
The enormous activity on the forex market is generated mostly by traders looking to buy and sell currencies in order to make a profit. You may be surprised to learn that only five percent of forex trading is conducted for commercial purposes, such as tourism and industry. Speculative traders are responsible for the remaining 95%.
What Affects Exchange Rates
In order to make a profit through forex trading a trader must choose a pair of currencies to trade on, pick the right time in which to begin the trade and know when to end it. It all boils down to identifying attractive exchange rates (how much the target currency is worth in terms of the base currency). Things which may affect the value of a particular currency are related to the economy in which the currency is used. Generally speaking the currency of a booming economy will maintain its value well. Events such as large scale natural disasters, wars, political unrest and release of worrying macroeconomic data may cause the currency involved to depreciate in value. This will immediately show on exchange rates against other currencies, most importantly the USD.
Pips and Spreads
The value of one currency in relation to another is the exchange rate, in forex trading the base currency is used to buy the target currency. When the base currency is USD, the target currency the JPY and the exchange rate 1.2674 thus means that each yen costs 1.2674 dollars. The fourth digit after the decimal point is in most cases the smallest figure describing the value of the target currency, this figure is called the "pip". The difference between the exchange rate at the beginning of a trade and at the end is called the spread, it may be in the trader's favor, a positive, profitable spread or a negative spread which means suffering a loss.