What is Forex

What is Forex
 

What is Forex Trading?

In its simple form, Forex means ‘Foreign Exchange’. When used in investment arenas, it refers to the process of trading in the currencies of different countries in a decentralized market. It resembles a lot to the stock market- but don’t be mistaken as it isn’t, and the rules are a little different. This is why independent Forex platforms exist to help you navigate this unique market easily.

Having said that, there is also a similarity between stocks and currencies in how profits are made. In the stock market, you buy stock x, believing its value will be higher in the future so you can sell at a profit. Forex is similar. Say you compare USD to the GBP. You could buy UK pounds, in the belief the same pound will soon strengthen against the dollar, and if proven right, later sell them at a profit, as their purchasing price strengthened.

Who can trade Forex?

We at CM trading believe the correct answer is ‘anyone who wants to, and is legally able to’. The Forex arena was, at one stage, very hampered by the lack of a connecting influential factor on the internet. You were forced to conduct Forex transactions through the bank, if you could afford to do so at all. As the digital space has increased our connectivity, Forex trading platforms have sprung up, and access to the Forex markets was made considerably simpler. There are even guides and helpful tools like Forex trading signals to help you make the most of your investing strategies.

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Currency Pairs

Forex trading is based on pairs of currencies. A currency pair is composed of two currency quotes – the base currency and the counter currency, and the value of one currency is quoted against the value of the other currency. The currency pair is defined by the worth of one currency in relation to the other, indicating how many units of the quote currency are required to buy a unit of the base currency. Each pair of currencies is represented by a currency code, which is a three-letter code, such as USD, ZAR and EUR. A pair of currencies goes higher or lower when the base currency strengthens or weakens, or when the quote currency strengthens or weakens.

Currency pairs are traded in the forex market, which is an extremely liquid, volatile market with the largest volume of activity around the globe. The forex market is open 25 hours a day, 5 days a week.

The strongest, most traded currency in the forex market is the USD, due to the extremely large size of the US economy. The most popular currency pairs are EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, USD/CAD. The USD/EUR is the most traded currency pair, and mostly brokers offer low spreads for it. This pair of currencies is relatively stable, and less volatile, which can suit goals of some traders.

Although these are the most popular currencies, this doesn't mean that they are the most likely to yield profits. Often, the opposite is true. To succeed in the forex market, a trader need to choose favorable setups for currencies that are relevant to current events, market direction and analysis.

GBP/JPY or GBP/NZD are considered relatively volatile, which can accommodate some traders due to the potential for swift profits. USD/CNY is a much more stable pair, but it can reach stagnation more frequently.

Currency Pairs Explained
 

Forex Trading Basic Terms

The base currency is the first currency which is represented in a currency pair, while the secondary currency, also referred to as the quote currency, is the second currency represented in the pair.

A Forex spread is the difference between the price at which a Forex broker buys the currency, and the price for which it is sold.

A bid is an offer made by a trader or investor to purchase a currency, stock or holding, which specifies both the price and scope of currency to be purchased.

A pip is a measurement unit that represents the value change between two currencies at a given time.

A bullish trader is an investor who estimates that the financial market or stock is on an uptrend, while a bearish trader is an investor who estimates that the financial market or stock is on a downtrend.

A bull market is a long-term period in which the financial market experiences price uptrends in stocks, forex, commodities and more. This often happens in cases when the economy performance is strong.

A Bear market is a long-term period in which stock prices tend to fall, trading becomes riskier, and confidence looms low.

What Affects the Forex Market?

Trading the news offers traders exciting opportunities, but also risks. News releases can increase volatility and generate unexpected trends. All the significant economies in the world publish data relating to GDP, inflation, employment rates and more.

The economic calendar is an excellent tool for trading the news, as it allows traders to take into account key events in advance and plan their trading strategy. The economic calendar comprises three categories of information – previous reading, forecast and actual reading. The forecast is a kind of median of the estimates made by different analysts and experts. When the actual number is far apart from the forecast, the impact of the release on the market is stronger, and when the number is closer to the forecast, the effect is minor. For instance, in the case of the NFP, these three numbers are released for each NFP, allowing the trader to make estimation about the upcoming release and prepare for it.

When trading the news, you should try to identify the most critical news event relevant at the time, and shape your trading according to it. It's good to plan a strategy, but if your expectations do not reflect the market reaction, it's best to be flexible and change your plans.

According to studies, the market reacts to financial events from 30 minutes to days on end. The main effect takes place in the first two days, but the impact may linger until 4 days after the event.

The most important news events that affect trading include key political events and trends, interest rate announcements, retail sales, consumer price index, employment data, industrial production, business sentiment surveys, consumer confidence surveys, gross domestic product, crude oil inventories, and more.

How would Forex trading benefit me?

You may be wondering why you should choose this market- often portrayed as more ‘risky’ than others. If you’re prone to faulty, hasty decisions, none of the markets are for you, not just Forex. If not, this platform offers an immense opportunity to access a highly liquid market. Daily activity is immense, and never slows- the Forex market operates at all hours. While volatility can sometimes be a little risky, remember it can also equal major profits. With the growth of Forex trading signals and other resources to help you stay safe in the markets, you may well find that this is the right trading platform for you.

CM Trading guides you through this finance essential

Here at CM trading, we're well aware of how intimidating it can to break into the Forex world. Before even considering the intricacies of Forex trading signals and the right Forex platform, it’s critical to properly understand the market and what the investment arena means when it discusses ‘Forex’. Most of us are, of course, well aware it stands for ‘Foreign Exchange’- but how well are you acquainted with what the term really means? Do you know the Forex restrictions for your country? How sure are you about why Forex trading would be beneficial for you? We’re here to answer all these questions and more.
CM trading believes everyone can leverage the power of Forex to help grow their personal wealth. With Forex trading signals, Forex platforms and other tools proliferating daily, you can thrive in the trading world.

 

Join CM Trading today and enjoy the best trading experience you can get!

 

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HIGH RISK WARNING:
Trading Foreign Exchange (Forex) and Contracts for Differences (CFD’s) is highly speculative, carries a high level of risk and may not be suitable for all investors. You may sustain a loss of some or all of your invested capital, therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading on margin.

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