Forex Trading 101Reading Time: 4 Min Experience Level:Beginner
What is the Forex Market?
Before we start explaining what the Forex market is, let us first break down the word itself. Forex is derived from “Foreign (FOR) Exchange (EX)”, which indicates that it is where individuals and entities speculate on and exchange currencies.
The Forex market is the largest and most liquid market in the world, and it opens 24/5. It is also decentralized, as there isn’t a physical location where traders go to buy and sell currencies.
Forex History
- 1876: Implementing Gold Exchange Standard (Stabilizing world currencies by pegging them to gold price).
- World War 2: Abandoning the Gold Exchange Standard.
- 1944: Adopting the Bretton Woods System (Making the US Dollar the primary reserve currency backed by gold).
- 1971: Ending the Bretton Woods System.
- 1976: Accepting the Floating Foreign Exchange Rates.
What is Forex Trading?
Before we dive into betting on the rise or fall of currencies, we first need to explain an essential aspect of Forex, which is currency pairs.
A currency pair is the quotation of two different currencies (the first being the base currency, and the second being the quote currency), with the value of one being compared to the other. There are three types of currency pairs:
Majors: Currency pairs that include any two of the following currencies:
- Australian Dollar (AUD)
- British Pound (GBP)
- US Dollar (USD)
- Canadian Dollar (CAD)
- Euro (EUR)
- Japanese Yen (JPY)
- Swiss Franc (CHF)
Minors (AKA crosses): Currency pairs that are not major. These pairs can include only one of the above major currencies or even none of them.
Exotics: Currencies of emerging economies. They are the least liquid among the three types. Examples of these are:
- EUR/TRY
- JPY/NOK
- NZD/SGD
So, when we trade Forex, we speculate on the price of one currency against another. For example, if you think the USD is going to rise against the JPY, you can buy the USD/JPY pair when its price is low and then sell it when it rises to make a profit.
Why Trade Forex?
Aside from being the largest market in the world, with a daily turnover of approximately USD 6.6 trillion (number in 2019), trading Forex has plenty of advantages:
Accessibility: Since it is decentralized and open 24/5, you can trade Forex at your convenience.
Volatility: You can take advantage of the frequent and rapid changes in exchange rates, thus profiting from rising or falling markets.
No commissions: Generally, there aren’t any trading commissions. For large volume trades, very low commissions may apply, which allows you to maximize your profit.
Despite Forex being a great market for trading, beginners should be aware that it also carries potential risks.