What is the Forex Market?

Forex is a global market where people trade currencies by selling one currency to buy another. For example, you might sell Euros to buy American Dollars or sell American Dollars to buy Canadian dollars. Traders make such trades because they are hoping to sell their intended currencies at the right moment and make a profit. This market is decentralized. It means that forex trades can happen all over the world through brokers or exchanges. You can even make your forex trades at home through the internet.

The forex market is huge, and more than 6 trillion dollars is traded worldwide every day. There are many currencies in this market, but some of them are more popular than others. The popular ones are “major currencies”, and they are related to large economies. The major currencies include USD, EUR, GBP, JPY, CAD, NZD, AUD, CHF. Other currencies that are not among the major ones are “minor currencies”.

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As you know, forex trading involves selling a currency to buy another one at the same time. The two currencies that are being sold or bought make a currency pair. There are three currency pairs in the market: Majors, Crosses, and Exotics.  Whenever one of the major currencies is bought or sold against the American dollar, we call it a major currency pair. They include more than 80% of all trades in the market. When a currency pair includes two major currencies, but none of them is the U.S. dollar, it is called a currency cross. And finally, when a major currency is paired with the currency from an emerging market, it is known as an exotic pair.

Since major currencies are traded more than others, they are more liquid. It means that you can buy and sell them faster. The relative value of all these currencies changes all the time. These changes provide traders with a situation to make a profit. The strength or weakness of economies in different countries influences the value of their currencies. For example, if some traders think that the Japanese economy will improve compared to the U.S. economy, they will sell U.S. Dollars to buy Japanese Yen. Due to the pressure of supply and demand, the value of JPY will increase against USD. Correct predictions will help you make an excellent profit.

History

The history of the forex market dates back to about 2500 years ago, when people trade silver and gold coins. About 1000 years ago, different governments used copper to mint coins. Then Italy established the first bank to facilitate currency transactions.

The first official forex market was founded around 500 years ago in Amsterdam. It provided people with an environment where they could easily trade different currencies. After that, forex markets were established all over the world one by one.

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Then, in 1875, the gold standard was introduced. Based on the gold standard, the value of minted coins of different countries could not exceed the value of protected golds in the treasuries. This standard aimed to preserve the value of a currency. World war one abolished the gold standard since countries had to print more money to cover their expenses. Also, the number of forex trading centers increased significantly after the first world war.

The Bretton Woods system was created during World War 2. This system defined the value of each currency based on the U.S. dollar and gold. But this system was not stable, and the Jamaica Accords replaced it in 1976. Based on this system, the currency rates were no longer dependent on gold, and they were floating. Currently, the forex market uses this system.

Purpose of the Forex Market

Forex markets are established to facilitate the exchanging process of one currency for the equivalent value in another currency with a specific market rate. These exchanges have two primary goals. The first one refers to countries, governments, institutions, companies or even individuals that need foreign currencies for their businesses or other purposes. For example, a German company may need to import some products from Japan, and they have to use the Japanese Yen to buy them. In this situation, they must exchange the euro with the Japanese yen to buy their intended products.

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The second reason is making a profit. Many traders worldwide buy and sell different currency pairs to make a profit based on fluctuations in the market.

How to trade in the Forex market

Select a currency pair

Since traders always have to sell a currency to buy the equivalent value of another currency simultaneously. People always trade the currencies in a pair. Most amateur and professional traders use the major currency pairs. But you are free to choose any currency pair as long as you have a plan.

Analyze the market

Before doing any trading activity, you must do your research and analyze the market perfectly. At first, you may find many resources about the forex market, but you should always narrow down your research to a specific currency pair. Using old and present data with technical analysis and fundamental analysis will help you increase your insight about a currency pair. Never act based on your emotions because it usually doesn’t end well.

Check the prices

There are always two prices for each currency pair. Consider this currency pair for a moment, EUR/GBP. The first currency is called the base currency (EUR), and the second one is called the quote currency (GBP).

The first amount (1.1037) is the price at which you can sell the currency pair. And the second one (1.1039) is the price at which you can buy the currency pair. The spread refers to the difference between these two prices. Pip refers to the smallest possible price change in an exchange rate, and it stands for Percentage in Point. Different brokers offer various spreads, but here in DeltaFX, we provide competitive spreads for many popular currency pairs.

Pick your position

Forex trading is different from trading stocks. For trading stocks, you identify one direction in the market and trade based on that direction. However, in the forex market, you buy and sell currencies at the same time. Therefore, you should identify two market directions.

In a buy position, you think the value of the base currency is increasing compared to the quote currency. So, you predict that the value of EUR will rise against GBP, and you buy it (based on the above example). But in a sell position, you think the value of the base currency will fall compared to the quote currency. And if you are selling EUR/GBP, you predict that the price of EUR is falling against GBP.

How to trade with a low budget in the forex market

Brokers defined a standard amount for 100,000 units of any currency, and they call it one “Lot”. Many traders did not have such a budget to trade one lot of a currency pair. Then brokers decided to reduce the trading volume unit, and they offered 0.1 or 0.01 lots. These amounts were much lower, but still, some traders could not afford them.

Brokers found the solution in giving loans to traders. They introduced the trading leverages to help traders. These leverages help traders to multiply their funds. For example, a trader who has 100$ in his account can trade up to 1000$ with a 1:100 leverage. Some brokers offer leverages up to 1:1000, which can multiply your funds 1000 times.

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Pros and Cons of the Forex market

Pros:

• Forex trading involves fewer commissions and fees compared to trading stocks.
• You can trade in the forex market whenever you want, and due to high fluctuations, some positions can be profitable in a short period.
• Due to technology development, you can easily trade in the market via your mobile phone or laptop.
• Due to the high number of active traders in the forex market, the liquidity is always high.
• There is no central regulator for the forex market. Lack of regulation helps to keep costs low. It also makes traders able to take short positions. Due to security reasons, some markets ban short positions.  
• The forex market experiences high volatility every day. Wise traders who spot the right opportunities can make tons of profit.
• There are many currency pairs in this market. We know eight of them as the major currencies. Traders can always find many opportunities due to the great variety of currency pairs.
• The low capital requirement of this market makes traders with low budgets able to enter the market easily. In addition, traders can enjoy high leverages to boost their profit.
• The high amount of information in this market makes it easy for everyone to enter the market. Traders can take advantage of fundamental and technical analysis with a few mouse clicks.

Cons:

• This market is not regulated, and sometimes amateur traders trade against professional ones.
• Multiple factors affect the prices in the forex market. The most notable ones are political and economic news which are very hard to analyze.
• Leverages are not always profitable. On the one hand, you may be able to multiply your profit in a winning position. But on the other hand, the leverages may increase the amount of money that you lose in a position.
• You are all alone in the forex market. You may be able to ask for the help of professionals in the stock market, but here you have to learn everything by yourself with almost no assistance.  Here in DeltaFX, we have provided you with excellent educational content.
• High volatility may be necessary and good for profit, but it may also lead to huge losses for some traders. Always use stop losses to prevent them.

Conclusion

Some people think the forex market is an emerging market, but as we mentioned earlier, it is very old, and you can easily find its roots in the past. However, due to the advancement of technology in recent years, the forex market has been updating accordingly. Furthermore, considering this market’s high trading volume and vastness, it requires a unique trading system. Furthermore, considering this market’s high trading volume and vastness, it requires a unique trading system. Also, many players in this field have made trading in this market a challenge, and it highlights the need for learning and training in the Forex market. To learn more about this market, read the Forex Terms section on the DeltaFX Broker website.

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