Investing For Beginners: An Introduction to the Stock Market, Stock Market Investing for Beginners, An introduction to the Forex Market, Options Trading by David Nelson

Author:David Nelson [Nelson, David]
Language: eng
Format: epub
Published: 2017-04-09T07:00:00+00:00

THE BASICS OF FOREX TRADING

The currency trading marketing, commonly known as the foreign exchange, or forex, market is the largest and fastest growing market in the entire world. In fact, its daily turnover is close to 2.5 trillion dollars and most of its biggest players are corporations, hedge funds, central and commercial banks, institutional investors, and private individuals.

Similar to other markets, forex trading involves goods that are traded back and forth. However, in the forex market, the goods in question are the currencies of various countries, in addition to gold and silver. For instance, you might buy pounds with the US dollar or may sell the Chinese Yuan for Euros. In simpler terms, it’s trading one currency for another.

Exchange Rates

Due to the fact that currencies are traded in pairs and one currency is exchanged for another, the rate at which they are exchanged is known as the exchange rate. The U.S. is traded more than any other currency in the foreign exchange market and most currencies are exchanged against it.

All international currencies are on a floating exchange rate, i.e. the currency price is solely determined by the forex market based on the supply and demand of those currencies, relative to other currencies. In addition to this, because the market is so large, players as large as central banks do not possess control over it and, hence, cannot manipulate the market and move prices according to their will.

Apart from this, currency is also traded in pairs. 85% of all daily transactions in the forex market involve trading of the four major currencies in four major currency pairs. These pairs are:

EUR/USD – the Euro and the U.S. Dollar

USD/JPY – the U.S. Dollar and the Japanese Yen

USD/CHF – the U.S. Dollar and the Swiss Franc

GBP/USD – the British Pound and the U.S. Dollar

Here’s how the forex market works: if you think that, for instance, the Japanese Yen will appreciate against the U.S. Dollar, then you can exchange the Yen for the Dollar and stay in it. If everything goes accordingly, you can exchange the dollar back for the Yen and earn a profit. The first currency in the pair in question is known as the base currency whereas the second currency is the quote currency or the counter currency. In mathematical terms, the base currency is the denominator while the counter currency is the numerator.

The exchange rate indicates to the buyer how much they need to pay to obtain one unit of the base currency. Not only this, but the exchange rate tells the seller how much of the counter currency they will receive by selling one unit of the base currency.

The forex market is a crucial component of the worldwide market and is operating 24 hours a day, almost 5 days a week. Currencies are traded around the world in the major financial zones, including New York, Zurich, Frankfurt, London, Tokyo, Sydney, Hong Kong, and Paris. The market is not limited to any time zone and is active any time of any day.

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