The Forex market is the largest market in the world. More than six trillion dollars are traded here every day. Due to this, there is a lot of liquidity in this market. So what is the Forex market? How can we trade in it and let us understand it in our own simple language. Let us understand the mechanism of Forex market trading and some basic concepts in today’s blog.
What is Forex Market ?
The Forex market is the foreign exchange market where currencies of different countries are exchanged and this market is open 24*5 from Monday to Friday.
Main participants:
- Central Banks ( Federal Reserve, BOJ)
- Commercial Banks
- Corporates
- Retail Traders
- Hedge Funds
The Concept of Currency Pairs :
Forex trading is done in currency pairs. A currency pair is a combination of two currencies. For example, the EURUSD pair is made up of the two currencies EUR and USD, and we trade in the EURUSD currency pair.
- Base Currency: First currency
- Quote Currency: Second currency
Example: Eur/USD = 1.1100 means for 1 Euro you will get 1.1100 USD.
Types of Currency Pairs
1. Major Pairs
Currency pairs that include the USD as the currency are called major currency pairs. These major currency pairs are the most traded.
- EUR/USD
- GBP/USD
- USD/JPY
- USD/CHF
- AUD/USD
- USD/CAD
- NZD/USD
2. Minor Pairs
Currency pairs that do not have the USD as their currency, but are still traded, are called minor currency pairs.
- EUR/GBP
- GBP/JPY
- AUD/NZD
3. Exotic Pairs
Currency pairs where there is one major currency and one developing currency are called exotic currency pairs.
- USD/INR
- USD/TRY
- EUR/THB
How it Work?
- Decentralized Market: There is no central exchange, trading happens through banks, brokers, institutions.
- Bid/Ask System:
Bid: The price the broker is ready to buy from you.
Ask: The price the broker is ready to sell to you. - Order Execution: Your orders (buy/sell) are executed through the market’s liquidity providers. A good broker is a must for fast execution.
Forex Market Timing
Forex market is a global market, it is open 24*5, Monday to Friday.
- Sydney Session
- Tokyo Session
- London Session
- New York Session
Best time to trade: London and New York Session
Forex Pricing: What Affects It?
- Economic Indicators:
- Interest rates, GDP, inflation, employment data
- Political Events:
- Elections, Government policies
- Supply-Demand:
- When the demand for a currency increases, its price goes up
Tools for Forex Trading
If you want to start forex trading, you will need a few tools and things:
- Forex trading account (through a broker)
- Trading platform (e.g. MT5, cTrader)
- Charting tools (TradingView, etc.)
- Economic calendar (to view news and events)
Leverage & Margin:
In Forex you can control large positions with small capital by using leverage. Example: 1:500 leverage means if you have $1,00 you can trade up to $50,000.
Forex Trading Example:
So let’s understand how to trade the EUR/USD currency pair in Forex.
You think the price of EUR or USD is going to rise or fall. Let’s see how you can trade the EUR/USD currency pair at that time.
the price of EUR/USD is 1.1100
You buy 1 lot (1 lot = 100,000 units)
The price moved to 1.1150
Your profit: 50 pips = $500 (if 1 pip = $10)
Risk and Money Management Factor:
Forex is a highly volatile and leveraged market. Wrong trades can lead to heavy losses. Therefore, risk management and money management is very important:
- Use Stop loss order
- Avoid Over-leverage
- Risk per Trade 1%
- Start with Demo account.
Understanding the Forex market is the first step in your trading journey. How currency pairs work, what factors affect their prices, and what times the market is active – all this information will make you a responsible and informed trader.
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