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what is forex

What is Forex Definition

In short:

The term Forex is a contraction of the English phrase Foreign Exchange, and means “Exchange” (It is the market where currencies are traded). There is no central market for currency exchange; Forex is an over-the-counter market that is active in major international financial centers such as: (London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney).

Forex is the largest financial market in the world, with an estimated daily trading volume of around 5.300 billion. It is therefore the largest and most liquid market in the world in terms of trading volume.

Unlike the exchange, Forex allows you to place orders 24 hours a day, five days a week (banks are closed on weekends). Forex, in particular, has always only been traded by wealthy clients, but in recent years people from other social classes have been able to start trading with just a few tens of dollars, thanks to the rise of many online forex brokers in South Africa.

How Forex Trading Works:

what is forex trading

Photo showing How Forex Trading Works

Forex trading is totally dematerialized, decentralized and not linked to a particular stock market. It allows you to trade in currencies almost 24 hours a day, 5 days a week. Almost all transactions are carried out over the counter: brokers and banks trade directly with each other without the intermediary of the exchange. Forex is an unregulated market.

The main intermediaries in Forex trading are banks and brokers that allow clients to trade online. They make financial instruments available to hedge or speculate on changes in exchange rates. With online trading sites in South Africa, you can access the market through a platform with real time quotes. The broker’s compensation is usually on the spread, which is the difference between the bid price, called “Bid”, and the selling price, called “ASK”. Most forex brokers offer attractive bonuses to encourage trading, such as with double deposit sums or other bonuses offered.

Forex Principles:

In forex, currencies are always sold and bought every two, ie in pairs. One can, for example, exchange Euro for Dollar. A simple way to do this is to position EUR / USD, and when EUR / USD is 1.3105 in quote, you can:

Want to buy 1 euro for $ 1.3105 (buy pair)

Want to sell 1 euro for $ 1,3105 (sell pair)

The fourth decimal place of the trade is called pip. So when the price goes from 1.310 5 to 1.310 7, we say that it gained two pips. Conversely, when the scoring pass went from 1.310 5 to 1.310 3, we say she lost two pip. And indeed, the course of the currency pair is unstable and constantly changing. This will enable profits in two ways:

By buying a pair, then selling sometime later, when your price is higher;

Or by selling the pair, repurchasing back some time later, when your price is lower.

To make a profit, it is necessary to know how to correctly anticipate the direction of the evolution of quotations.

Note that the EUR / USD pair is different from the USD / EUR pair and are the subject of two separate quotes as they are closely linked. And if you need to exchange Euro for Dollar, you can:

Sell ​​euros by paying in dollars. And then sell EUR / USD as per the model mentioned above. If the value of EUR / USD pair is 1.3105 then the sale will be 1 euro to 1.3105 dollars;

Buy dollars by paying in euros. And then buy USD / EUR as per the model mentioned above. For a pair of 0.7632, then the purchase will be 1 dollar to 0.7632 euros.

The US dollar (USD) remains the currency of major reference in the foreign exchange market. In practice, a currency is always cited by another currency that serves as a reference. The dollar may be very well quoted based on the euro, Australian dollar, Canadian dollar, pound sterling, or other currencies.

Leverage Effect:

A key feature of Forex trading is leverage: Forex brokers allow their clients to bet more money than they actually have on their account and this is called leverage. Thus, leverage allows the market to sum up to a thousand times the value that the customer has, but with a higher risk. There are several levels of leverage that generally range from 1: 100 (investment in a currency pair is multiplied by 100) and 1: 400.

The use of the leverage effect in Forex trading is common, because variations in the course of currency pairs are often low and difficult to make a profit without this leverage effect.

Example:
If your broker allows leverage x 100, this means that for every $ 100 deposited in your account, you can invest 100 x 100 = $ 10,000.

This technique allows for the extraordinary multiplication of your earnings if you find a good trend. But it can also accelerate your losses, and even lead there is a greater loss than was your initial investment. This technique should be reserved for more experienced investors only.