Forex trading takes place at any time on a global scale, and for decades, the foreign exchange market has been popular among traders because of its high volatility。

What is Forex Trading?？

Simply put, forex trading is the buying and selling of currency pairs.。As the name suggests, a currency pair is two currencies measured by the exchange rate, which is the exchange rate that converts one currency into another。

The exchange rate is constantly fluctuating and is active 24 hours a day, 6 days a week。The foreign exchange market is the world's largest capital market, with a daily trading volume of up to $5 trillion and ample trading liquidity.。

Major currency pairs

The most liquid currency pair is the main currency pair, one of the two currencies must be the US dollar。The main currencies, including the US dollar, are:

• EUR
• JPY Japanese Yen
• GBP Pound Sterling
• CHF Swiss Franc
• AUD AUD
• CAD CAD
• NZD New Zealand Dollar

Nearly 73% of currency transactions involve the U.S. dollar, and the most liquid currency pair is the EUR / USD - EUR / USD, which describes how many dollars it takes to buy 1 euro。

About 28% of total foreign exchange transactions are traded in EUR / USD.。

Several other currency pairs also have strong liquidity, and currency pairs that do not use the U.S. dollar as the base or relative currency are called cross-currency pairs.。

Cross currency pairs such as EUR / JPY, GBP / JPY and EUR / GBP are well traded, and currency pairs that do not include one of the major currencies are minor or exotic currency pairs。

Base currency and relative currency

A currency pair consists of two currencies: the base currency and the relative currency, and the quotation of each currency pair determines the base currency and the relative currency.。

The base currency is your first currency in the quote currency pair, for example, in EUR / USD, the euro is the base currency and the second currency is called the relative currency。

In short, the exchange rate tells you how much relative currency it takes to buy 1 unit of base currency。For example, if you see a quote of 107 USD / JPY.96, which means 107 is needed.96 yen to buy a dollar。

Buy / sell spreads and liquidity

Trading activity in the forex market takes place around the clock, providing the opportunity to enter and exit trades at any time, buying and selling at any time is so attractive to many investors。

Most forex brokers do not charge commission when you enter and exit a trade。Instead, brokers offer you the price at which they are willing to buy currency pairs and sell them, a difference known as the bid-ask spread。

• Bid - Broker willing to buy currency pair。
• Quote - Broker willing to sell currency pair。

You can take 1.1104 offer to buy EUR / USD, or make a lower bid, and then wait to see if it is a deal, the cost is borne by you。If purchased in the market, orders that are traded at quoted prices are called "market orders."。If your bid is lower than the asking price, it is called a "limit order."。

You can buy at 107.96 Sell USD / JPY。If you sell in the market, you may close at this level; or you can make a sale offer above this level, which is a limit order。

The spread describes the difference between the bid and ask prices, and when the spread begins to widen, it proves that the liquidity of the market is declining。

spot and forward market

Forex trading uses two different time frames, including spot and forward trading。

The exchange rate of a currency pair for immediate delivery is called the spot price。The settlement time for spot transactions is 2 working days, and any transaction settled over 2 working days is called a forward price.。

Most trades do not require you to deliver the currency, the broker will handle everything in the currency process for you。You need to know that if you trade through a retail forex broker, you will trade spot rates。If you hold a currency pair for more than 2 business days, your broker will need to transfer your trade to the forward market。

The price in the forward market is slightly different from the spot market because it includes interest charges for holding the currency pair for more than 2 business days.。

Futures exchanges also offer currency trading as they allow traders to buy and sell currency futures contracts。These are forward contracts, settled at a specific period in the future, and interest charges are included in the futures price.。

Leverage

Whether trading in the spot, forward or futures markets, one of the benefits is leverage。Leverage allows you to increase returns by borrowing funds to increase the size of your position。

Brokers provide leverage through margin accounts。When you apply for a margin account, the broker will usually ask about your knowledge and experience to determine how much leverage is available to you when trading。

The leverage ratio can range from 2 to 1 to 400 to 1。This means that some brokers will allow you to increase the value of your trade up to 400 times, known as highly leveraged trading.。

Leverage can increase position size。For example, when using a market account, you may only need to invest $100 to use 100 to 1 leverage to hold a $10,000 USD / JPY position。

Using leverage can yield huge returns。If you invest only $100 and use 100-to-1 leverage, a 1% gain of $10,000 will provide you with a 100x return on your trading capital。

Leverage is two-way。If you lose 1%, you may lose the money you put into the trade.。The broker will continuously monitor your account and ask for more funds if the net value of the account is below the critical level。

If a margin account is opened, be sure to read the agreement carefully。Most margin accounts allow a broker to liquidate your position if the NAV level is below the critical level。

Participants in Forex Trading

The foreign exchange market provides a place for traders to speculate and also allows companies to hedge their liabilities。

For example, if an American company makes money in euros in France, they eventually need to convert the euros into dollars。They need to use the money market to sell euros and buy dollars。

In addition, central banks continue to buy and sell currencies for regulatory operations and to monitor the value of their regulatory currencies。Commercial and investment banks have been trading forex in the market, buying and selling for clients and fulfilling their obligations。

The most liquid foreign exchange transactions are conducted between commercial and investment banks, known as the interbank market。Hedge funds and pension funds are also very active in holding speculative positions and providing liquidity。Moreover, the retail market is very active。

In addition to spot, forward and futures markets, traders can also hold currency positions through the use of contracts for difference (CFD), exchange-traded funds (ETFs), and exchange-traded notes (ETNs).。

Forex Fundamentals and Technical Analysis

There are many ways a trader can try to determine the future movement of a currency pair。To evaluate currency pairs, traders often use different types of analysis。

Fundamental analysis is the evaluation of macro events, including economic activity and interest rate-focused monetary policy.。

The other is technical analysis, which focuses on historical prices.。Technical analysis is a broad category, and a number of patterns and studies can be used to determine the future movement of currency pairs.。One of the best ways to use technical analysis is through price charts。

Price Chart

Price charts will help you determine the past and future movements of the currency。

A currency pair chart can be a line or bar chart, or even a candle chart。You can place moving averages on the chart to find support and resistance levels and trends。Alternatively, research tools, such as MACD or RSI for determining momentum, can be added to determine whether the exchange rate is overbought or oversold。

The graph can help many traders estimate the future direction of the currency pair。

Essentials

Money markets are the most liquid capital markets and provide traders, corporate treasurers, hedge funds and bankers with the tools to generate returns。

There are hundreds of currency pairs, but major pairs offer the best liquidity around the clock。When trading currency pairs, you can gain leverage through a margin account。

While leverage can significantly increase returns, it also increases risk。

Finally, one of the best ways to evaluate currency pairs is through charts that will allow you to see past price movements and be able to use technical analysis to analyze each currency pair。