What is Forex
Forex trading is the simultaneous exchange, buying and selling, of one currency for another primarily for speculation purposes. Forex (also known as ‘foreign exchange’, ‘Forex’ or ‘FX’) is the largest market in the world in terms of volume, trading over US$5.3 trillion per day.
Why trade Forex
The New York Stock Exchange has a daily turnover of around US$50 billion, instead the foreign exchange market trades over $5.3 trillion daily, thus it is one of the biggest financial markets in the world. The size of the market brings many benefits in terms of costs and liquidity.
Forex trading is essentially the act of buying one currency and selling another within the same transaction, with the main intent of speculation. Currencies fluctuate in value, they both rise (appreciate) and fall (depreciate) against each other because of economical and geopolitical factors that affect their country of origin. The main goal of Forex traders is to understand these changes and buy or sell the stronger currency pairs against the weaker currency pairs in order to profit from changes in their value. There are no limits in how many trades one can do, or how long a trader needs to keep the currency pair. As soon as the value has changed and the Forex trader is happy to close the trade, he can do so at any time. In fact, unlike other markets the foreign exchange market trades 24 hours a day.
The Forex market has no physical location or central exchange, unlike other markets, and this is known as OTC (over-the-counter). It is traded worldwide on a network of businesses, banks and individuals. Forex brokers like Tickmill give access to this pool of currencies through a platform called MetaTrader 4 (MT4), allowing traders to take advantage of the constantly fluctuating prices changing in value against each other.
The foreign exchange market is unique because it is one of the largest markets in the world and it operates 24 hours a day five days a week. Trading starts on Monday morning in Wellington New Zealand which is Sunday evening in London (22:00 GMT), and trades 24 hours until the close of business at 5pm (Eastern Standard Time – EST) on Friday in New York, which is 22:00 GMT. This gives traders the opportunity to act quickly and take advantage of economic news around the world around the clock.
In the past, forex trading was a market accessible only by large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals. These markets were initially only accessible via phone, but with the widespread availability of the internet, forex trading became accessible to the average investor. Smaller broker firms and software companies created their own platforms, like MetaTrader, giving the average investor access to large interbank liquidity pools.
Most currencies move less than 1% a day, making it one of the least volatile markets. By offering leverage, brokers have made a 1% movement very attractive. Most commonly brokers offer up to 500 times leverage, this means that your initial deposit could allow you to trade a trade 500 times the value of your deposit. Example: If you decide to buy 10,000 euro against the dollar you would only need a deposit of 20 euro in US dollar value (22 USD) as you are trading the dollar against the euro. Higher leverage means higher risk, but not all traders use the leverage offered as trading forex is also about managing one’s risk.
What affects prices in the forex market
Forex prices are influenced by a broad number of factors from international to national economic or geo-political situations. These can be monitored following the news or our forex calendar. They create a lot of trading opportunities to the average investor.
Some of the key factors that influence forex prices are:
- Political and economic stability
- Monetary policy
- Currency intervention
- Natural disasters (earthquakes, tsunamis, etc.)
As with most financial instruments, the difference between the buy (bid price or buy price) and sell price (offer price or ask price) is called the spread. An example of the spread: If we take EUR/USD from our previous example you will see on our platform the price is quoting at 1.06021/ 1.06025 (in this case the spread is 0.4 pips or 0.00004). The exception to the 4-decimal places is the Japanese yen that displays a 3-pip spread 122.814/122.816 (0.2 spread).