Forex (Foreign Exchange) is the exchange or currency market where currency pairs are traded, such as EUR/USD or GBP/USD. Forex is an over-the-counter (OTC) market where investors or speculators can buy or sell currency pairs.
Forex is the currency market, and these, unlike most other tradable assets on the stock exchange markets, are both instruments and economic indicators. If countries were companies – currencies would be their shares!
Forex – What Does It Mean?
Knowing the current language of Forex Traders will not make you become an excellent trader overnight, but it will certainly help you to understand at least what is necessary to become one!
Here are some of the most important Forex Trading terms:
- The Currency Pairs
- A Forex Quote
- the pips
- The Spread
- The Margin
- The Leverage1
- The swap
- The Lot or Size of the Contract
- CFDs _
- The MT4 and MT5 Forex Platforms
Any trader or investor who wants to get involved in the Forex market or copy trading needs to understand what Forex is and how the Forex market works, as well as the most basic terms of this market. Testing your Forex trading techniques and strategies as you progress in your learning process on a demo account is a good way to understand the Forex market and how it works.
How Do Forex Quotes Work?
Understanding a currency pair is a fundamental notion for the fundamentals of Forex trading. Take the EUR/USD pair as an example. The euro is called the base currency. The US dollar is called the counterparty currency. The valuation of the base currency against the counterparty gives us the quote. If we look at the example of the EUR/USD pair or any other currency pair on the trading platform, there are two values, the asking price and the bid price.
These values are usually arranged in this form: EUR/USD 1.1234/1.1240. This quotation tells us that we can buy one euro with 1.1240 US dollars because it is the amount requested by the bank – the asking price it is willing to sell.
At the same time, we can sell one euro for 1.1234 US dollars – the bank’s offer price, at which it is willing to buy. It is easy to see that, in general, a bank buys a currency at a lower price and sells that same currency at a marginally higher cost. Banks can do this because they have more leverage than brokerages.
However, you cannot simply buy or sell EUR/USD as if, for example, you were buying shares in a company. This happens because the EUR/USD currency pair does not exist. Currencies exist individually but not as a pair. In this way, traders speculate on future price movements without actually buying the coins (physically).
In the Forex Market, profit is achieved through the appreciation or depreciation of the value of a certain currency about another. Let’s say, for example, that you buy Euros and sell US Dollars (using the EUR/USD currency pair).
To profit, in this case, you need to sell US Dollars when the Euro price appreciates against the Dollar price.
For anyone who is learning more about the Forex Market and discovering how it works, there are two things you should consider. First, traders never buy or sell physical currency. Second, buying and selling occur simultaneously in all foreign exchange transactions.