Introduction to Forex?

Topic Covers | Introduction on Forex, Explanation of the World Forex Markets, Foreign Exchange


What is Forex?

Basic Explanation of the Worldwide Forex Markets
The Foreign Exchange Market is the place, where currencies are traded. Currencies are very important to most people around the world, whether they realize it or not. The reason is, that currencies need to be exchanged in order to conduct foreign trade and business. If somebody is living in the USA and wants to buy cheese from Switzerland, either the buyer or the company where he buys the cheese from has to pay the Swiss exporter for the cheese in Swiss Francs (CHF). This means that the US importer would have to exchange the equivalent value of US Dollars (USD) into Swiss Francs. The very same is valid for traveling. A German tourist in Egypt can not pay in Euros (EUR) to see the pyramids because it is not the locally accepted currency. Therefore the tourist has to exchange his Euros into the local currency, in this case the Egyptian Pound (EGP), at the current exchange rate.

This absolute need to exchange currencies is the basic reason why the Foreign Exchange Market is the largest and most liquid financial market in the world. For Facts and Figures of the worldwide Foreign Exchange Market please visit our market overview of the Bank for International Settlements (BIS).

One unique aspect of this international market is, that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange place. The market is open 24 hours a day, five days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - across every time zone. This means that when the trading day in the USA ends, the Forex Market begins a new day in Australia, Tokyo and Hong Kong. As such, the FX market can be extremely active any time of the day specially when two major markets are overlapping, with price quotes changing constantly.

One of the main reasons for the immense attractiveness of Forex/4X/FX trading is the Leverage. That's why Forex trading is entirely different from stock trading or futures trading. Foreign Exchange Trading leverage can be enormous, from 1:50 (=invest $ 1, control $ 50) up to 1:1000 (=invest $ 1, control $ 1000), whatever the trader is choosing as risk level and whatever the Broker is offering.
Super high leverage is an important selling point for many Online Forex Brokers. How many times have you seen "control $ 100,000 with an investment of only $ 250"? Those numbers are correct, and the profit (and loss) potential of super high leverage is sometimes scaring, especially for beginners.


How does Foreign Exchange Trading work and how to trade in the Forex Market?

The whole system of quoting prices is quite simple. Currencies are always traded in pairs. All possible pairs have already been created and are available for trading. In other words, you will trade not a separate currency, but the pair and the quote is an exchange rate from one currency to another. The exchange rate is always defined as 1 unit of the first currency in a pair as value of the second currency in a pair.

For example: EUR/CHF=1.2050 means 1 EUR=1.2050 CHF or EUR/JPY=106.35 means 1 EUR=106.35 JPY

When an investor trades in the Foreign Exchange Market, he always trades a combination of two currencies (a cross-pair or currency-pair) in which one currency is bought (long) and the cross currency is sold (short). This means the investor is speculating on the prospect of one of the two currencies appreciating in value in relation to the other one.

If you are investing for example USD 1 with a leverage of 1:400 - you will be in control of USD 400 and the difference of the exchange rate of USD 400 to another currency (like EUR, JPY or CHF), between opening and closing the trade, is your win or loss...