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What is Forex? And how it works?

The word FOREX refers to the term Foreign Exchange, which is nothing other than the international exchange market. This is why some people call the Forex market, the currency market. It is one of the financial markets with the highest volume of transactions, reaching around US $ 6.6 trillion in daily operations.

The Exchange Rate: The Basis of the Forex Market

The exchange rate measures the number of units of a currency that are needed to acquire another and is the fundamental basis of the entire Forex market.

For example, when you decide to go on vacation to Disney you know that you will need to have dollars to be able to pay for transportation, accommodation and food when you are there but… how do I know how much it will cost me to buy those US dollars? The exchange rate will give you that information, you will know how many euros, canadian dollars or any other currency you will have to pay to buy a certain amount of US dollars.

If they told you that the Exchange Rate of your currency against the dollar is 3.31 what they are trying to tell you is that to buy 1 US dollar you need to deliver 3.31 of your local currency.

Example of the Exchange Rate between the Euro and the Dollar

The exchange rate fluctuates at all hours and every day (this is how the exchange houses make their money), today the exchange rate of your currency against the dollar could be 3.31 but tomorrow it could rise to 3.41, this means that the dollar would have become more expensive. Perhaps in a week the exchange rate will drop to 3.02, which would mean that the dollar has become much cheaper for you.

A currency trader or trader takes advantage of these variations in the price of currencies to make money.

How to buy and sell currencies on the Forex market?

You already know that the exchange rate is fundamental for the functioning of the currency market, but… how do I buy and sell currencies like a trader does?

The first thing you will need is to have a trading platform, the most used platform is Metatrader 4 and it can be provided by a currency broker such as DUO Markets.

Well, you already have your platform, now what next?

Well, now it is important that you know that in the currency market currencies ARE TRADED IN PAIRS.

In pairs? How is that?

Yes, in pairs. In the image you can see the US dollar / Peruvian sol exchange rate (which is expressed as USD/PEN). This is the nomenclature that you will find in the entire currency market, you will always see two currencies together. It can be the British pound and the dollar (GBP/USD) or the euro with the dollar (EUR/USD) and so on a large number of combinations.

USDPEN Exchange Rate

Example of the Gold-Dollar Exchange Rate

Bid and Ask prices

The bid price is the price that the market is willing to pay you, so the bid price will be the price at which you can sell a currency pair.

The ask price is the price at which the market is willing to sell you, so the ask price is the price at which you can buy a currency pair.

In the chart you can see an example of this.

You can see that there is a difference in decimals between the bid price and the ask price, what is that? This is called the SPREAD.

Characteristics of the Forex market

Trade 24/5

The Forex market has the great advantage of being open to the retail public 24 hours a day, 5 days a week. It opens on Sunday afternoon (Latin America) and closes on Friday afternoon.

High liquidity

The foreign exchange market moves a gigantic amount of money per day, it is estimated that about US $ 6.6 billion dollars are traded daily (among all the operations that are made). That makes it a much more liquid market than the New York share Exchange.

Easy access

Thanks to the development of technologies and globalization, today it is much easier to be part of the Forex market. You can enter with a reduced capital through an easy-to-use platform provided by a reliable broker (intermediary).

What are the risks of trading in the Forex market?

• Unregulated intermediaries or brokers: One of the main risks in this market (as in many other markets) is the presence of unregulated brokers. That is why it is VERY important that you choose a regulated broker as a financial intermediary.

• Leverage: Leverage can be considered an advantage but if you are new to trading it is definitely a risk. Leverage is a tool that allows you to multiply your capital available to operate. For example, if you have a $ 100 account, a 1: 100 leverage means that you would have up to $ 10,000 as available capital to do your trades. If you want to know more about how leverage works and why it is called a double-edged sword, go here.

• Bad publicity: The Forex market is often sold as an opportunity to make quick and easy money but this is a lie. If you really want to be a trader and make a living from this it is important that you know that you will have to spend a lot of time educating yourself on how the market works. There is no easy money on the Forex.

What do you want to learn today?

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