Forex for Beginners: Unveiling the currency exchange and how to trade it

Forex can be explained as a network where buyers and sellers come together to exchange currency at a mutually agreed-upon price. It is the method through which individuals, companies, and central banks exchange one currency for another.

The primary motivation behind most currency conversions is to generate a profit. The daily conversion of currencies can cause significant price fluctuations in certain currencies. The fluctuation in forex markets is what makes it appealing to traders, as it offers the potential for higher profits but also comes with increased risk.

In this article, we explain what is forex trading is and how does it work.

What is the forex market?

Currencies are traded on the foreign exchange market. The most distinctive feature of this market is the absence of a central marketplace. Rather, over-the-counter (OTC) electronic currency trading is carried out. This means that instead of taking place on a single, centralised exchange, all transactions take place among traders throughout the globe via computer networks.

The market is open five and a half days a week, 24 hours a day. The main financial hubs of Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo, and Zurich are the global hubs for currency trading, spanning nearly all time zones. This implies that after the U.S. trading day concludes, the currency market opens in Tokyo and Hong Kong. With price quotes fluctuating all the time, the currency market can be extremely lively at any given moment.

How does forex trade work?

Forex trading can be done in a number of ways, but they all operate by buying one currency and selling another at the same time. Many forex transactions have historically been completed through a forex broker, but with the growth of online trading, you can now use derivatives like CFD trading to profit from changes in currency prices.

With leveraged products like CFDs, you can start a position for a small portion of the trade’s total value. In contrast to non-leveraged products, you speculate on whether you believe the market will appreciate or depreciate rather than assume ownership of the asset.

Leveraged products can increase your profits, but if the market goes against you, they can also increase your losses.

What is leverage?

Leverage lets you trade huge sums of currency without paying the full price. A small margin deposit is made instead.
The full trade size determines your profit or loss when closing a leveraged position.

What is the spread?

The spread is the difference between forex pair buy and sell prices. Forex, like many financial markets offers two prices when you open a position. To open a long position, trade at the buy price, slightly above the market price. Short positions are opened at the sell price, somewhat below the market price.

What is a margin?

Margin is crucial to leveraged trading. This is the initial deposit you make to create and maintain a leveraged position. Remember that your margin requirement depends on your broker and deal size when trading forex with margin. Margins are usually reported as a percentage of the full position.

What is a pip?

Forex pair movement is measured in pips. Forex pips are one-digit movements in a currency pair’s fourth decimal place. Thus, GBP/USD jumps one pip from $1.35361 to $1.35371. Fractional pips, or pipettes, are the decimal places after the pip.

What is a lot?

Trading currencies in lots standardises forex trades. Forex trades in tiny sums, so lots are large: 100,000 base currency units. Because individual traders may not have 100,000 pounds (or whatever currency) to trade, most forex trading is leveraged.

The bottom line is that there is a steep learning curve to forex trading, and the markets are very volatile. Given the risks involved, investors should proceed cautiously.