What is Forex Trading?
As many of you already know, Forex has the biggest market in the business right now. It has a daily trading volume that exceeds $4 trillion. No other market, even the stock market doesn’t come close to this. In fact, all the other markets together don’t make this much. With an incredible value like that, it is hard not to want to get into forex trading. But, how can you do that? What is Forex Trading? We will talk about these here below;
What is Forex?
The first thing you need to know is that forex is a trading market just like the stock market. The difference is that in forex trading, you don’t buy stocks. Instead, in forex, you work with currencies.
Even though you have never try forex market before, there is a change that you have done some forex in the past. If you have ever been to a foreign country, probably you had to obtain some amount of money in that country’s currency. During this transaction, you must have noticed that the amount of foreign money you can get with the same amount of your cash changes from time to time. It is because of the exchange rate changes. And sometimes these changes are beneficial for you. Basically, this is what forex is. So, You actually already know the answer to the question “What is Forex Trading?”
What is Forex Trading in Short?
Forex is a short name for “Foreign exchange”. It is also known as “FX”, or simply “currency trading”. As you can understand by its name, forex is the act of buying and selling currencies and making a profit off the changes in the values.
Benefits of Forex
So, now you basically know “What is Forex Trading?”. Before talking about how forex work, let’s talk about its benefits over other markets.
The forex market is open all day and night. And, you can use the forex market five days of the week; from Sunday’s 9:00 pm GMT, to Friday’s 9:00 pm GMT. In the winter, these hours get one hour later. Basically, you can be much more flexible with the time you spare for forex trading.
This wide range of working time means you can buy or sell currency on the forex market 24 hours in working days. While in other markets you can have problems finding buyers because of the timing or value loses, in the forex market there are no problems for finding buyers or sellers.
Currencies and Pairs
Many countries in the world have their own currencies. All these currencies have three latter codes. For example; USD for American Dollars, EUR for Euros, GBP for British Pounds, TRY for Turkish Lira and more like those. These codes are what you can see when you look at a forex report.
You can find a list of these currency codes in our related articles.
Major Currencies and Minor Currencies
There are two main groups for these currencies. One group for “major currencies” and one group for “minor currencies”. The difference is that major currencies are the currencies of economically stronger countries.
The major currencies group contains the currencies of,
- The US
- The UK
- New Zealand
Pairs, bid, ask and spread
● Like we trade money with goods when we do daily shopping, while doing forex trading, we trade a certain currency with another one. These trading relations called “pairs”.
● The most traded pair in forex is EUR/USD. In this pair, EUR is the base currency and USD is the secondary or counter currency. Basically, the value of this pair is how much one EUR is worth in USD.
● The price for selling your currency for the secondary currency is called “bid”. And the price for buying the base currency with the secondary currency is called “ask”.
● The idea here is that “bid” and “ask” prices are different and this difference is called “spread”. The more a pair gets traded in the market, the more its spread gets smaller. And if a pair is not getting traded much, the spread will be bigger and bigger.
Major Pairs, Minor Pairs and Exotic Pairs
Just like currency groups, pairs have groups too. These groups are called Major pairs, Minor pairs, and Exotic pairs.
Major pairs are the pairs that have USD on one side and another major currency on the other side.
They are the most popular pairs.
Here you can see some of the biggest major pairs;
Minor pairs are the pairs that have major currencies on both sides but not USD.
For example, these pairs are minor pairs;
Exotic pairs are the pairs that have a major currency on one side and a minor currency on the other side.
For example, these pairs are exotic pairs;
What is Forex Pip?
The last thing you should know about “What is Forex Trading” is what the term “pip” means. Because many forex guides talk about pip, and if you don’t know what it means, you would not understand anything.
Pip is basically a measurement that is used in the forex market. You see that values like gains/losses or spreads written in pips in forex platforms.
In forex, most values are looking like “1.12345”. Most of the time, changes in these values are so small that writing the whole value becomes unnecessary. You usually see value changes like “from 1.12345 to 1.12355” which would be actually a big change in forex. This method of writing is both confusing and taking some time. This is why we use “pip”.
Pip is the change in the value of the fourth figure after the dot. So, for example; If the USD /AUD buy price increases from 0.60443 to 0.60453, then the gain is 1 pip. Or, if the EUR/USD buy price is 0.70326 and the selling price is 0.70320, then the spread is 0.6 pips.
This is a much faster and accepted way of presenting changes in the forex market. So, from now on, when you see pip values on the forex platform you can understand how significant a change is.
To learn about other forex terms, online forex trading, and forex websites you should follow check our other articles; “What is Forex Trading?”, “Forex Trading Tutorial For Beginners”, “Top 10 essential forex live sites”.
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