What is Forex Trading? A Beginner’s Guide

What is Forex

What is Forex

Forex, or Foreign Exchange Market (Wikipedia), is an international decentralized market for trading. It is made possible by a system of free currency exchange, where the price of one currency is determined according to the laws of market supply and demand relative to another currency.

Forex is the world’s largest financial market with a turnover of over 6 trillion dollars per day. This makes it the most liquid market, which gives traders the opportunity to buy and sell currencies almost instantly and without significant commission costs.

How does Forex Trading Work?

Forex trading is done by buying and selling assets on a brokers website, such as Pocket Option. For example, a currency pair is a quote of two different currencies where the first currency is the “base currency” and the second is the “quoted” currency. For example, in a EUR/USD pair, the euro is the base currency and the US dollar is the quoted currency. When a trader buys a currency pair, he is buying the base currency and simultaneously selling the quoted currency. Conversely, when selling a currency pair, the trader sells the base currency and buys the quoted currency.

The trader’s goal is to predict how the exchange rate of the currency pair will change over time. If the trader expects the base currency to strengthen against the quoted currency, the trader will buy the pair (go “buy” or “long”). If a trader expects the base currency to weaken against the quoted currency, he will sell the pair (go “sell” or “short”).

The price of a currency pair, known as the “exchange rate,” determines how many units of the quoted currency are required to buy one unit of the base currency. If the exchange rate of a currency pair goes up, it means that the base currency is getting stronger against the quoted currency, and vice versa.

Forex Market Analysis

Forex market analysis is divided into two types: technical and fundamental analysis.

  • Technical analysis is a method of predicting price movements by studying past market data: analyzing charts, using technical indicators (moving averages, stochastic oscillators, MACD, etc.).
  • Fundamental analysis is a method of predicting price movements by studying macroeconomic data: interest rates, economic indicators (data on GDP, inflation, unemployment, etc.), global events.

Forex Trading Assets

Trading assets are instruments that can be bought and sold in the financial markets. Let’s take a look at some of the assets:

  • Currencies – they are traded in pairs, such as EUR/USD (Euro and US Dollar), GBP/USD (British Pound and US Dollar) and USD/JPY (US Dollar and Japanese Yen).
  • Indices – are weighted averages of groups of stocks, usually the largest companies in a particular country or industry. Examples are the S&P 500 (USA), FTSE 100 (UK) and DAX (Germany). Indices allow you to trade the overall health of the market rather than individual stocks.
  • Cryptocurrencies are digital or virtual currencies that use cryptography for security. They have become popular in forex because of their high volatility and profit potential.
  • Commodities are a wide range of assets: gold, silver, oil and agricultural products. Trading commodity futures is a way to capitalize on fluctuations in the prices of these commodities.

Forex Trading Assets

Forex Trading Terminals: what is Important to Know

Forex trading terminals are software used to conduct trading operations in the financial markets. Here is what you should know about them:

  • A good terminal should provide real-time chart viewing, the use of indicators, the ability to open and close trades, manage risks by setting stop-loss and take-profit, etc.
  • The terminal should be stable and reliable, providing continuous access to the market and fast execution of orders.
  • It is important that the trading terminal is compatible with your operating system, be it Windows, MacOS or Linux, mobile versions allowing you to trade on the go.
  • Terminals offer 24/7 support to help with any technical issues that may arise.