What is Foreign Exchange?

Foreign Exchange, more commonly known as Forex or FX, relates to the trading of currency pair crosses. It is the biggest market in the world by far, and the most liquid in the world with trillions changing hands every day. The Forex market attracts many traders, beginners and experienced alike because of its high liquidity and volatility.”

The Forex Market

With approximately $4 trillion USD traded in the market every day, the forex market has the highest liquidity in the world. Basically, this means that one can buy almost any currency he wishes in high volumes while the market is open. The forex market is open 24 hours, 5 days a week – Monday to Friday. Trading begins with the opening of the market in Australia, Asia, Europe to follow and then the USA until the markets close.

The forex market start time during the summer is on Sunday at 9:00pm GMT, and ends at 9:00pm GMT on Friday. In the winter it’s 10:00pm-10:00pm accordingly. That results with currencies being traded at all times, day or night. Unlike some other instruments, where a downfall of the market would leave traders with untradeable assets, the forex market can always find a buyer or a seller.

Currency Pairs

There are hundreds of currencies in the world, and each has a three-letter symbol. American Dollars are USD, Euros are EUR, Swiss Francs are CHF, British Pounds are GBP and onwards to all the currencies.

 

Currency pairs are divided into three main categories – Major, Minor and Exotic currency pairs. The major currencies are derived from the most powerful economies around the globe – the US, Japan, the UK, the Euro Zone, Canada, Australia, Switzerland and New Zealand. 

 

When going to a store to buy groceries, we need to exchange one valuable asset for another – money for milk, for example. The same goes for trading forex – we buy or sell one currency for the other. The currencies in the pairs are referred to as one against another.

 

The Major pairs usually involve the US Dollar, and therefore the most traded ones. The seven major pairs are EURUSD, USDJPY, GBPUSD, USDCAD, USDCHF, AUDUSD and NZDUSD.

Forex Basic Terms

The most popular pair traded is the Euro vs. American Dollar, or EUR/USD. The currency on the left is called the base currency, and is the one we wish to buy or sell; the one on the right is the secondary currency, and is the one we use to make the transaction. 

 

Each pair has two prices – the price for selling the base currency (ask) and a price for buying it (bid). The difference between them is called a spread, and represents the amount brokers charge to open the position. 

 

The more a currency is traded, i.e. high liquidity, its spreads will be narrower. The rarer the pair is, the wider the spreads will be, since lower liquidity usually entails increased volatility and higher risk for brokers. 

 

Usually a quote will be presented with four numbers after the dot, for instance 1.2356. In the case of EURUSD it means for every Euro the trader wishes to buy he will have to invest 1.2356 US dollars. Any change in the currency value will usually be seen on the fourth figure after the dot, mainly known as a pip. The spreads, gains and losses will usually be presented in pips.

Some other terms of the online forex trading world are going Long and going Short, which stand respectively for ‘buying’ and ‘selling’. A trader who speculates the market will rise is called a ‘Bullish Trader’, while on the other side stands the ‘Bearish Trader’, who is more on the defensive side. In accordance, the terms ‘Bull Market’ and ‘Bear Market’ are used to describe the way the market goes.

 

In the past, every trader called his broker and instructed him on actions to be made. Today the trades are done directly by the client on a software, called a trading platform. The most popular trading platforms is the Metatrader 4 and Metatrader 5 from Metaquotes.

Leverage Trading

Leverage is given by the broker to enable traders to hold trading positions that are larger than what one’s own capital would otherwise allow.

It is important to remember that the profits and losses are determined by the position size, and as leverage trading can magnify profits also losses can be enhanced, thus proper risk management techniques have to be used.

What affects the Forex Market?

The forex market has high liquidity, due to an elevated supply and demand rate. Traders apply transactions based on financial events, as well as general events. Naturally, when a currency will be on a high demand, its value will raise comparing to the other currencies, and vice versa.

Financial events are frequent statements by countries, central banks or other financial institutions, on topics such as unemployment rate, manufacture numbers and many more. A decrease in a country’s unemployment rate can indicate that the economy is strong, and this can lead to an increase of the local currency.

If it’s a major one it will affect other currencies as well. Before the event takes place traders speculate on its content, and based on these speculations open positions. All the events can be seen and followed on the economic calendar.

Why Trade Forex with PomeloFx?

When trading forex, as well as any other instrument, you must be able to trade with confidence. Profits can never be guaranteed, and any type of trading has its advantages and disadvantages, as well as the risk of losing funds. At PomeloFx we are committed to a set of values which define our relationship with our customers. As such, we provide the best trading experience possible, offering top notch multilingual customer service and the most advanced and user-friendly trading platforms.

 

You can also use our teaching materials in the education tab on out site. You will find there a wide collection of articles, video tutorials and many more tools that will assist you in every step of the way. We know trading might be a bit overwhelming and even scary at times, but we do all we can to make sure you are fully prepared to begin trading in the real world.

 

These tools and many others allow you to trade peacefully and know that PomeloFx has your back. Everything we provide is on the highest possible level, and we go to great measures to constantly innovate and improve them for you.

 

Interested in forex trading with PomeloFx?