Foreign Exchange Markets

The foreign exchange market (Forex, FX or currency market) is a global decentralised market, made up of many different markets, since the trade between two individual currencies – I.e the Pound and the U.S. Dollar – each constitutes a market. The Forex market is the largest capital market in the world, with an average of $5.3 trillion worth of transactions each day. The vast majority of this forex trading is conducted over the counter, which means transactions are executed through a computerised network of banks, brokers and market makers instead of on a centralised exchange 

Decentralised market structure

The Forex market is decentralised. In other words, there is no physical location where investors go to trade currencies. Forex traders use the internet to check the quotes of various currency pairs from different dealers. Financial centers around the world – London, New York, Tokyo, Hong Kong and Singapore – function as anchors of trading between a wide range of different types of buyers and sellers. To obtain access to interbank currency market you will need to turn to a Forex broker. This tutorial is created to acquaint you with Forex basics and explain you in simple terms how to trade currencies. This will be your first step in becoming a successful Forex trader. Please check our next courses to further develop your trading skills.

When is the forex market open?

FX market is open 24 hours a day, 5 days a week. There are trading sessions which correspond to the time during which stock markets are open in a particular region of the world. Usually, trade volume is higher at the intersection of the sessions. FX day always begins in Australia and New Zealand and then spreads to Asia. After that it’s the turn of Europe and, finally, the United States and Canada join in. You can trade anytime you wish during the working week. You can open your currency position for a couple of hours or even less (intraday trading) or for a couple of days (long-term trading) – just as you see fit.  

Approximate time of trading sessions (GMT)

Market Summer (approx. April – October) Winter (approx. October – April)
Australia 22:00-07:00 21:00-06:00
Japan 23:00-08:00 23:00-08:00
UK 07:00-16:00 08:00-17:00
USA 12:00-21:00 13:00-22:00

Currency Pairs. Base and quote currencies

Currencies available in the Forex market are traded in pairs under abbreviations like EUR/USD (Euro vs Dollar), GBP/USD (Pound vs Dollar) and more. In order to determine the relative value of one currency, you need to put it up against another to compare. The first currency in the pair is called the base currency, while the second currency is called the quote or counter currency. For example, the exchange rate for the EUR/USD pair is 1.1000. It means that one euro costs 1.1000 US dollars (one dollar and 10 cents).

Twelve most actively traded currencies in the FX market

  • The United States Dollar – USD ($)
  • European Union Euro – EUR (€)
  • Japanese Yen – JPY (¥)
  • Pound Sterling — GBP (£)
  • Australian Dollar — AUD ($)
  • Swiss Franc — CHF (Fr)
  • Canadian Dollar — CAD ($)
  • Mexican Peso — MXP ($)
  • Chinese Yuan — CNY (¥)
  • New Zealand Dollar — NZD ($)
  • Swedish Krona — SEK (kr)
  • Russian Ruble — RUB

Currency price calculations

The price of the base currency is calculated by the value in units of the quote currency If you were to buy the pair GBP/USD you are buying £ Pounds and Selling $ Dollars. If you sell GBP/USD you are selling £ Pound and buying $ Dollar.

The Forex market divides it’s currency pairs into Majors, Crosses and exotic pairs. All major pairs include the US dollar and very popular in the markets amongst traders: EUR/USD. USD/JPY, USD/CHF,AUD/USD etc.

Crosses consist of two popular currencies that do not include the US dollar. The most common crosses include the Euro, the Yen, and the British Pound: EUR/GBP, EUR/JPY, GBP/JPY, EUR/AUD etc.

Exotic currency pairs consist of one major currency and one currency, representing the developing (Brazil, Mexico, India etc.) or small (Sweden, Norway etc.) economy. Exotics are rarely traded on Forex and usually have less attractive trading conditions.

Bid & Ask Price

There are 2 types of currency prices at Forex are Bid and Ask. The price we pay to buy the pair is called Ask. It is always slightly above the market price. The price, at which we sell the pair on Forex, is called Bid. It is always slightly below the market price.

The price we see on the chart is always a Bid price. Contact the EFX account support and you will be shown how to check the Ask price in your trading platform. Ask price is always higher than the Bid price by a few pips. The difference between these two prices is called Spread. Spread is commission we pay to our broker for every transaction. It’s the similar logic behind Ebay collecting a small fee on an item sold.

How to measure spread: SPREAD = ASK – BID

For example, the EUR/USD Bid/Ask currency rates are 1.1250/1.1251. You will buy the pair at the higher Ask price of 1.1251 and sell it at the lower Bid price of 1.1250. This represents a spread of 1 pip.

The more popular currency pairs have smaller spread which make them especially lucrative for trades, with liquidity. Despite Spread, Forex has a considerable advantage in expenses in comparison to stock or options market. As spread is quoted in pips, traders can simply calculate the cost of every trade by multiplying the spread in pips by the value of 1 pip.

How to access the market

Basically, anyone with the appropriate funds — which on some platforms could be as little as $25— and access to the Internet through a smartphone or computer can begin trading in the forex market. Forex trading has many benefits over trading in stocks, commodities or any other asset class because of the unregulated nature of the forex market. The current widespread availability of the forex market is vastly different from how things were not too long ago, when only major financial institutions, banks, funds, large traders and corporations were the only ones that had access to making foreign exchange transactions.

Today, gaining access to the forex market is relatively easy. Opening a forex account is now a simple matter of transferring funds to a reputable online forex broker, opening a foreign exchange account with a major bank, or trading forex futures through a regulated broker in your country. In addition, a forex demo account can be opened with many online brokers, allowing a novice trader the opportunity to test strategies and experience forex trading without committing any actual funds.

Many of these online forex brokers offer their services through a Metatrader 4 online trading platform or one they have developed for the use of their clients. The MT4 platform is not only an order execution program, but it is also a complete technical analysis and automated trading platform.

Forex trading is not for everyone though, since with the increased leverage the market offers, a small trader could have their account wiped out in a matter of minutes — if not seconds — after the release of an important economic number. Even though prudent measures can, and should, be taken for limiting risk, the inherent volatility in the forex market makes it difficult for traders with limited funds to hold large positions for any significant length of time.

The keys to successful forex trading consist in having a succinct and easy to follow trading plan, incorporating prudent money and risk management techniques and having the discipline to adhere to both. While forex trading may not be for everyone, for some people, trading currencies can be a viable path to achieving financial independence

Gaining access to the live markets requires a forex platform, offered by forex brokers who provide connection to the market. Join the EFX community and experience the market with assistance.

Opening a forex trading account is not complicated, but traders will need a few things to get started.

Traders will usually have to provide information on an application regarding their level of experience and knowledge, along with their trading intentions. They will also need to provide identification and make a minimum deposit of funds in their account.

The exact steps involved in opening an account may vary from brokerage to brokerage, but the procedure typically involves the following:

  1. Visit broker’s website and review the types of accounts available. These can include small-scale accounts with low minimum balances designed for beginning traders; or accounts with sophisticated features designed for active traders.
  2. Complete an application form.
  3. Upon completing the application, you will be registered with a username and password that will give you access to your account.
  4. Log in to the brokerage’s client portal.
  5. Arrange for the transfer of funds from your bank to deposit funds into your account. This may be through check, credit or debit card, or electronic transfer from your bank account. Note: Using a credit card for this purpose can be subject to interest charges.
  6. Once your account has been funded, you are now ready to start trading. At this point, you will want to review any recommendations or special details that your broker provides regarding use of their trading platform before actually making your first trade. Some brokerages may offer free trading simulator programs to allow traders to practice before actually putting money into trading).

Summary

Opening a forex trading account is similar to opening other types of financial accounts. However, traders will want to carefully consider the reputation, services and costs of the available brokerages before making a commitment to depositing funds and beginning trading with a particular firm.

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