What is Forex?

Would you like to trade in the world’s most liquid market? The Forex market offers more liquidity than any other global financial market. It operates twenty four hours a day five days per week, with a turnover of up to US$ 5 trillion daily. Foreign exchange is often referred to as the Forex or FX market and is the marketplace in which the exchange of currencies, between two counter-parties takes place, at a mutually agreed rate or price. There is no central marketplace or exchange floor, rather Forex is an Over-the-Counter or OTC market.

Forex is an Over-the-Counter Market (OTC)

The majority of Forex trades are settled as spot trades, as opposed to settlement at a set date in the future as with many exchange traded products. Forex provides traders with the ability to execute buy or sell trades around the clock, with few restrictions. Creating opportunities for them to profit from variations in the value of one currency against another. 

What is Forex Trading? 

Forex trading is when you attempt to generate a profit by speculating on the value of one currency compared to another. Foreign currencies can be traded because the value of a currency will fluctuate, or its exchange rate value will change, when compared to other currencies. 

Forex trading is normally conducted through 'margin trading', where a small collateral deposit worth a percentage of a total trade's value, is required to trade. 

Foreign Exchange Rates make the market

Forex Rates are quoted by the market making and trading divisions of commercial / investments banks, certain hedge funds and other large institutional investors and market participants. These prices or Forex Rates are disseminated electronically, via dealing screens across the globe, to form what is known as the Foreign Exchange market.

Components of a Forex Rate

All Forex Rates are by their very nature comprised of two components, the two currencies whose conversion into the other the Forex Rate is expressing. These two currencies comprise the base currency, the first named currency and the quote currency, the second named currency. In which the Forex Rate is expressed. For example if we look at the Forex Rate for US Dollars versus Japanese Yen we find might find the following rate. The Forex rate is comprised of two prices. The Bid and Ask which together create the two way price common to every Forex Rate. These prices inform a trader about the levels at which they can (in this example) buy Dollars and sell Yen or sell Dollars and buy Yen. Depending on their views about which way the rate is likely to move in future.

Is Forex Trading Right for You?

To successfully trade in forex, you will need to have good knowledge of foreign exchange, leverage, volatility and the conditions of each country whose currency you are trading. 

You will need to predict how these conditions affect the relative value of those currencies. This is difficult as so many factors come into play, including politics, economics and market confidence. Some of these can be unexpected and even random events. 

You will also need to:

• Know how forex works in detail

• Have time to do research and monitor your trades

• Understand the online platforms used for trading and their functionality

• Read the product disclosure statement and discuss the risks with your financial adviser

• Be able to afford to lose more than the amount you invested.

Should I Buy or Sell?

Buying a currency pair, for example GBP/USD, means that you buy the first currency in the pair (GBP) while simultaneously selling the second currency in the pair (USD) on expectations that the cross rate price will rise in value and your profits will rise in line with any increase in that price. 

Conversely, selling a currency pair means that you sell the first currency in the pair (GBP) while simultaneously buying the second currency in the pair (USD) on expectations that the price will fall and your profits rise.