What is Forex: An explanation of forex trading
It’s the largest and most liquid market in the world but just what is forex? In this forex trading guide we take a look at the fundamentals of forex to give you a basic understanding of this competitive marketplace before you seek guidance from a professional forex trading specialist.
Forex Explained: What is forex trading?
Forex, also abbreviated to FX, is a short version of foreign exchange. The idea is that one currency is traded in return for another based on a certain exchange price within the over-the-counter market. A traders skill is to estimate if a currency will fall or rise in comparison with another: successful predictions will allow clients to gain profits based on the value changes.
There are many factors that will influence whether or not a currency will appreciate (rise) or depreciate (fall). These include everything from economics and geopolitics to natural disasters. While predicting how Forex prices will change in the future investors could potentially earn significant profits based on how the values exchange.
Forex Explained: Where is the forex market?
There is no physical marketplace: and indeed there is no central location for the Forex market. Instead it operates 24hrs/day based on individuals, global businesses and banks.
Forex trading occurs around the clock: it starts in Wellington in New Zealand, progresses to Tokyo, Japan and Singapore as the centre for Asian trade before moving to Europe, with trading focused on London. Finally, it moves to New York City as the centre of North American trade. As prices are constantly changing throughout the day, there are many opportunities for savvy traders to make profits.
According to statistics, the Forex market is actually the largest in the world. Its turnover exceeds $4trillion on a single day. Compare this to the New York Stock Exchange which boasts a daily turnover of $50billion… significantly behind the Forex markets.
Forex Explained: How does forex trading work?
As explained, the idea of Forex trading is to make a profit by predicting how the markets will move. As the market runs for 24hrs, the emphasis on price gapping – when prices jump to different levels without trading – is reduced. This means that traders can take positions when they choose: although there are normally times when the market is not as active.
Some key points to consider about Forex trading include:
– Currency pricing: Each trade is based on the idea of placing one currency up against another. There is a base currency – and it is compared to counter currencies. In each case, the base currency will be shown on the left. Professional forex traders make predictions about whether the base currency will increase in strength or whether it will fall. If they believe it will increase in strength against the counter currency then the idea is that this pair should be bought. If they expect it to fall, then they should sell that currency.
– It’s possible to trade small lots: A lot could be as low as 1,000 units.
– Leveraging is vital: With forex trading, leveraging is a key to success – although it can also lead to losses too. For example, if you had leverage in the region of 1:100 and made a deposit of £100, then a deposit of just £1,000 could be used to control a total currency of £100,000. This could potentially lead to huge gains in your forex trading; but losses can leap too.
– Read the PIP: The PIP is the percentage in points: it is quoted up to five decimal places. So any change to the fourth decimal point is known as a PIP.
– Understand the spread: The difference from the asking price to the bidding price is known as the spread.
Forex Explained: How to succeed in forex trading
Succeeding in Forex trading is complicated: and there is a definite element of risk involved. As such you should seek guidance from a company with a credible history and one that is fully regulated.
Unite is proud to be associated with a professional, fully FCA regulated Forex trading company based in the heart of London. If you’d like to find out more about its service, then contact us now.
PLEASE NOTE: These guides are meant to offer a general outline of some key forex-related areas. They are not to be constituted as financial advice and the strategies should only be considered by professional traders in selected circumstances. If you are considering entering the forex trading markets, seek independent financial advice first.