Understand Forex Trading
Forex Trading Tools
What is Forex and How Does it Work?
Foreign exchange or forex involves the buying and selling of the world’s national currencies like the U.S. dollar and the UK’s pound sterling. The decentralized forex market is the largest capital market in the world with a daily turnover in excess of $5 trillion day.
Trading in the forex market begins in Wellington, New Zealand at 5 p.m. EST on Sunday and ends in New York on Friday at 5 p.m. ET, so the market trades for 24 hours each day throughout the trading week.
How it Works
Trading in the forex market involves the simultaneous buying of one currency and the selling of another. All currency trades involve a currency pair and when taking a forex position, you simultaneously go long 1 currency and short another.
The base currency is the 1st currency in a currency pair, while the 2nd currency is the quote or counter currency. The exchange rate of the currency pair is the amount of quote currency needed to buy one unit of the base currency.
The most active currency pairs have the U.S. dollar as a component and are known as the majors. They are:
- EUR/USD: The EU euro versus the U.S. dollar.
- USD/JPY: The U.S. dollar versus the Japanese yen.
- GBP/USD: The UK pound sterling versus the U.S. dollar.
- USD/CHF: The U.S. dollar versus the Swiss franc.
- AUD/USD: The Australian dollar versus the U.S. dollar.
- USD/CAD: The U.S. dollar versus the Canadian dollar.
- NZD/USD: The New Zealand dollar versus the U.S. dollar
Currency pairs that do not include the U.S. dollar are known as crosses, and they often have considerably less liquid markets than the majors. Other less liquid pairs that do include the U.S. dollar consist of the minor and exotic currency pairs.
Dealing Spreads
Brokers and market makers operating in the forex market make their money largely from the dealing spread instead of charging a commission. The dealing spread consists of the difference between the bid and offers price for a particular currency pair.
The bid is the exchange rate where the market maker will buy a currency pair, while the offer is the exchange rate where the market maker will sell it. Most active currency pairs are quoted to the 4th decimal place (0.0001 or 1 pip) and have tight dealing spreads between 1 to 3 pips, while less liquid pairs tend to have wider dealing spreads.
The width of the dealing spread is an important cost to a trader and can add up considerably for those who trade actively. Spreads can also vary depending on market conditions. You should look at a broker’s typical dealing spreads when choosing the best forex broker for your particular needs.
Some forex news:
https://www.dailyfx.com/market-news
https://www.forexfactory.com/news
https://www.fxempire.com/news/forex-news