What is forex trading about? Forex is basically a combination of 2 words in English namely “foreign” and “exchange”
The meaning of two foreign exchange words as an activity of foreign currency exchange. Thus forex involves 2 currencies from different countries as the object of the trade.
Deeper in the process of buying and selling currencies there is the role of the main financial markets that exist throughout the world and take place 24 hours a day in sequence.
When someone goes to another country, he needs the currency of the country visited, to pay for his needs while there. In this case, he will exchange his own country’s currency to the currency of the country visited.
For example, the Japanese go to America, then he will exchange the Yen into the USD, and this person has become part of the forex activities
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What is the forex exchange market?
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What is forex trading about? Currency exchange rates always change at any time. From this change a person can get a profit when he exchanges his currency when he will return to his home country when the currency rate rises.
But on the contrary, he could have gotten less value of his country’s currency when the currency rate declined. New York Stock Exchange (NYSE), is a large stock market with a trading volume reaching 22.4 $ billion per day.
But apparently, the forex market is much bigger than the NYSE. Where per day the trading volume reaches 5 trillion dollars. This is a very extraordinary difference like a monster with a gecko.
With ratio up to 200 times if compared to the stock market and the forex market. From the total volume trading of the forex market. Retail traders contribute a volume of 5% -6% around $ 300-400 billion.
The forex market is open 24 hours 5 days a week and only closes on weekends. Of course, this is different from the stock market which has a shorter time based on working hours. The forex market does not have closing hours every working day. But trading has only shifted to different financial centers around the world.
Starting from Sydney, then Tokyo, then London, then Frankfurt and finally, New York. Then trading resumed in Sydney and over again until the weekend.
What is traded in the forex market?
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What is being traded-in forex? the answer is money, but here a forex trader does not buy money physically, but he buys money symbolically. For example, a person buys 10 $ USD using Japanese Yen, he must spend the rate of 1 $ against Japanese Yen multiplied by 10, if the value of 1 $ equals 100 Yen then he needs 1000 Yen to get 10 $.
When a trader buys USD using the Japanese Yen, he expects the value of the USD to rise, which increases in value can reflect the economic condition of the American country, which is growing well. And if the value of the USD really goes up then he will get profit from the difference in the purchase price when he decides to resell the USD with Japanese Yen
How many currencies are traded in the forex?
In currency exchanges, there are many types of currency traded by traders, and the most traded are major currencies.
Major currencies consist of Dollars from the United States which also have a Buck nickname, Euros from Europe with the nickname Fiber, Yen from Japan, Pounds from Great Britain with a Cable nickname, Francs from Switzerland with a Swissy nickname, Dollars from Canada with a Loonie nickname, and Dollars from Australia with an Aussie nickname
But the USD is a currency that has many nicknames, some call it greenbacks, bones, benjis, benjamins, cheddar, paper, loot, scrilla, cheese, bread, moolah, dead presidents, and cash money.
Currency symbols usually have three letters, where the first two letters are the name of the country, and the third symbol is the name of the currency, for example, AUD, the letter AU is Australia, and the letter D is Dollar, this is quite easy to understand.
Buy and sell currency definition
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What is forex trading about trading is a buy and sells of one currency with another currency called pairs, for example, Japanese Yen and Dollar USD, with the symbol USDJPY or the British pound and the Japanese yen with the symbol GBP / JPY.
When you buy USDJPY, this means you buy USD using Japanese Yen, for example, the exchange rate of 1 $ is 100 Yen, you will spend 100 Yen to get 1 $ USD.
But a few moments later there will probably be a value of $ 1 no longer 100 Yen but to 120 Yen, in this case, if you resell USD to exchange with Yen, you will get 120 Yen from the price of 100 Yen before, in this case, you get 20 yen profit.
This is a simple description of the definition of buy and sells currency, but in forex trading, you need a broker as an intermediary to buy and sell foreign currencies.
The broker as a facilitator provides services access to the forex market or to the provider’s liquidity network. In forex there are so-called major pairs, these are the most liquid currency pairs and traded by many traders.
Major Currency pair
Major pairs consist of EUR/USD which represents the Eurozone / United States and referred to as “eurodollar”, USD/JPY which represents the United States / Japan and referred to as “dollar-yen”, GBP/USD represents the United Kingdom / United States and referred to as “pound dollar”, USD/CHF representing the United States / Switzerland referred to as “Swiss dollar”, and USD/CAD represents the United States / Canada and referred to as “dollar loonie”
Then AUD/USD representing Australia / United States is referred to as “Aussie dollar”, and finally NZD/USD representing New Zealand / United States referred to as “kiwi dollar”
Pairs that don’t contain USD are called cross pairs or crosses or some call minor pairs. The most-traded for pairs that do not contain USD are EUR, JPY, and GBP.
In euro cross consist
- EUR/CHF represents Eurozone / Switzerland and referred to as “euro swissy”
- Then EUR/GBP represents Eurozone / United Kingdom referred to as “euro pound”
- EUR/CAD represents Eurozone / Canada and referred to as “euro loonie”
- EUR/AUD representing Eurozone / Australia referred to as “euro aussie”
- EUR/NZD representing Eurozone / New Zealand is referred to as “euro kiwi”
- EUR/SEK representing Eurozone / Sweden referred to as “euro stockie”
- EUR/NOK represents Eurozone / Norway referred to as “euro nockie”
Yen Crosses consist
- EUR/JPY representing Eurozone / Japan referred to as “euro yen” or “yuppy”
- GBP/JPY representing the United Kingdom / Japan referred to as “pound yen” or “guppy”
- CHF/JPY representing Switzerland / Japan referred to as “Swissy yen”
- CAD/JPY representing Canada / Japan referred to as “Loonie yen”
- AUD/JPY representing Australia / Japan referred to as “Aussie yen”
- NZD/JPY representing New Zealand / Japan referred to as “Kiwi yen”
Pound Crosses consist
- GBP/CHF representing the United Kingdom / Switzerland referred to as “pound swissy”
- GBP/AUD representing the United Kingdom / Australia referred to as the “pound aussie”
- GBP/CAD representing the United Kingdom / Canada referred to as “pound loonie”
- GBP/NZD representing the United Kingdom / New Zealand referred to as the “pound kiwi”
Other Crosses consist
- AUD/CHF representing Australia / Switzerland referred to as “Aussie swissy”
- AUD/CAD representing Australia / Canada referred to as “Aussie loonie”
- AUD/NZD representing Australia / New Zealand referred to as “Aussie kiwi”
- CAD/CHF representing Canada / Switzerland referred to as “loonie swissy”
- NZD/CHF representing New Zealand / Switzerland referred to as “kiwi swissy”
- NZD/CAD representing New Zealand / Canada referred to as “kiwi loonie”
Exotic currency pair
What is forex trading about? Other pairs referred to as exotic pairs.
This refers to pairs that are paired from the major currencies with the currencies from emerging countries such as Brazil, Hungary, Turkey.
Maybe not all brokers offer this exotic pairs trading instrument, so you need to understand whether they provide or not for exotic pairs, and usually, the spread or commission for these exotic pairs is greater than major pairs, so you need to consider this reason if want trade with exotic pair.
Some examples of exotic pairs are
- USD/BRL representing the United States / Brazil referred to as “dollar real”
- USD/HKD represents the United States / Hong Kong
- USD/SAR representing the United States / Saudi Arabia referred to as “dollar riyal”
- USD/SGD represents the United States / Singapore
- USD/ZAR representing the United States / South Africa referred to as “dollar rand”
- USD/THB representing the United States / Thailand referred to as “dollar baht”
- USD/MXN representing the United States / Mexico referred to as “mex dollar”
- USD/DKK representing the United States / Denmark referred to as “dollar krone”
- USD/SEK representing the United States / Sweden referred to as “dollar stockie”
- USD/NOK representing the United States / Norway referred to as “dollar nockie”
- USD/RUB representing the United States / Russia referred to as “dollar ruble” or “Barney”
- USD/PLN representing the United States / Poland referred to as “dollar zloty”
Next up is the G10 currency, these are the ten most traded and most liquid currencies
- The United States with currency dollar and symbol USD
- European Union with the euro and the symbol EUR
- United Kingdom with the pound and the symbol GBP
- Japan with the yen and the symbol JPY
- Australia with a dollar and the symbol AUD
- New Zealand with the dollar and the symbol NZD
- Canada with a dollar and the symbol CAD
- Switzerland with the franc currency and the symbol CHF
- Norway with krone and the symbol NOK
- Sweden with a krona and the symbol SEK
- Denmark with krone and the symbol DKK
The word BRIICS is an extension of five developing countries: Brazil, Russia, India, Indonesia, China, and South Africa.
BRIICS is a term by Goldman Sachs to name a country with high economic growth recently.
- Brazil with currency real and symbol BRL
- Russia with currency ruble and symbol RUB
- Indian with currency rupee and symbol INR
- The Indonesian with currency rupiah and symbol IDR
- China with currency yuan and symbol CNY
- South Africa with currency rand and symbol ZAR
Global forex market size
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Forex market does not have a special place like the New York Stock Exchange, but forex transactions are electronic transactions called OTC or Over The Counter.
Thus a forex trader can make buying and selling transactions of currency pairs from any country as long as he has an internet connection.
The forex market continues to operate for 24 hours straight for five days from Monday to Friday.
The forex market is the largest market in the global financial market.
The most-traded currencies are the USD, which accounts for 84.9% of the total transactions, followed by the Euro with 39.1% and the Japanese Yen with 19.0%
USD biggest currency
USD is the biggest currency, because many investors, businesses and central banks pay attention to this currency.
According to data from the IMF that the USD becoming the largest foreign exchange reserves of 62% worldwide.
Another reason that makes the USD currency is the largest currency.
- America is the country with the world’s largest economy.
- The second reason is that America is a superpower country with military strength.
- America has good economic stability.
- Another reason is the United States as the most liquid financial market in the world.
- The US dollar becomes a global exchange medium, for example, to buy oil, if for example, South Africa wants to buy Saudi Arabia oil, they have to buy dollars to pay for the oil.
Speculation in the forex market
In forex, something important is commercial and financial transactions are part of the exchange of currencies, while the most are speculators who trade currencies.
These speculators carry more than 90% of the trading volume on the forex market. They buy and sell currencies in the hope of getting profit from high liquidity in the forex market.
Liquidity is a buy and sells volume that can change the price value at any time, making it easier for traders to buy and sell currencies.
Forex market is the most liquid and this is very important for traders because prices change so easily at any time, a liquid market environment allows traders to trade in large volumes but has little effect on the market.
Different ways to trade forex
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To speculate in the currency market, traders can choose different ways to trade forex, which are divided into several types, namely spot forex, futures, options, and exchange-traded funds or ETFs.
Futures meaning is a contract to buy or sell currency assets or other assets at a certain price in the future.
First introduced by the Chicago Mercantile Exchange (CME) in 1972.
Options meaning is a derivative of a financial instrument that gives the buyer the right or option, but not the obligation, to buy or sell a certain asset at a certain price on the expiration date of the option.
But for options trading is still limited with working hours, and liquidity is not like spot forex.
What ETFs definition is a mutual fund that is traded on a stock exchange.
ETFs is a collective investment contract whose investment units are listed and traded on a stock exchange as well as shares.
Like stocks or mutual funds in general, there are also investment managers and custodian banks.
This ETF is also limited to working hours and there are trading fees and other fees.
Spot market forex
Spot market transactions are the easiest way to trade directly on the spot market at the current price.
The fun thing about trading in a spot market is its simplicity, by using a trading platform, and traders can speculate with low initial capital, even for only $ 10.
With all-hour market access, for five days a week gives all speculators the opportunity to conduct buy and sell currency transactions at any time.
Forex market is the largest market that does not have a special place to make transactions, with high liquidity giving traders speculators the opportunity to profit from changes in the value of a currency pair.
Wherever, as long as you have internet access, a speculator trader can buy and sell currencies at any time.