What is Forex

Our Trading for Beginners section gives you all the information you need to start trading forex and CFDs with confidence. This should be your first stop to find out about currency pairs, how the forex market works, market analysis and CFD instruments.

 

What is forex?

Learn about the global FX market, currency pairs and how a trade works. One of the questions we get asked all the time is: “What is forex trading? When did it start? How big is it? Who are the major players? What makes currency rates change?”

 

About forex

Forex is the international market for the free trade of currencies. Traders place orders to buy one currency with another currency. For example, a trader may want to buy Euros with US dollars, and will use the forex market to do this.

The forex market is the world’s largest financial market. Over $4 trillion dollars worth of currency are traded each day. The amount of money traded in a week is bigger than the entire annual GDP of the United States!

The main currency used for forex trading is the US dollar.

 

When did forex start?

As the world continued to tear itself apart in the Second World War, there was an urgent need for financial stability. International negotiators from 29 countries met in Bretton Woods and agreed to a new economic system where, amongst other things, exchange rates would be fixed.

The International Monetary Fund (IMF) was established under the Bretton Woods agreement, and started to operate in 1949. All exchange rates changes above 1% had to be approved by the IMF, which had the effect of freezing these rates.

By the late 1960’s the fixed exchange rate system started to break down, due to a number of international political and economic factors. Finally, in 1971, President Nixon stopped the US dollar being converted directly to gold, as part of a set of measures designed to stem the collapse of the US economy. This was known as the Nixon shock, and lead to floating rate currency markets being established in early 1973. By 1976, all major currencies had floating exchange rates.

With floating rates, currencies could be traded freely, and the price changed based on market forces. The modern forex market was born.

 

Who trades on the forex market?

There are many different players in the forex market. Some trade to make profits, others trade to hedge their risks and others simply need foreign currency to pay for goods and services. The participants include the following:

  • Government central banks

  • Commercial banks

  • Investment banks

  • Brokers and dealers

  • Pension funds

  • Insurance companies

  • International corporations

  • Individuals

 

When is the forex market open?

Unlike stock exchanges, which have limited opening hours, the forex market is open 24 hours a day, five days a week. Banks need to buy and sell currency around the clock, and the forex market has to be open for them to do this.

 

What factors influence currency exchange rates?

As with any market, the forex market is driven by supply and demand:

  • If buyers exceed sellers, prices go up

  • If sellers outnumber buyers, prices go down

 

The following factors can influence exchange rates:

  • National economic performance

  • Central bank policy

  • Interest rates

  • Trade balances – imports and exports

  • Political factors – such as elections and policy changes

  • Market sentiment – expectations and rumours

  • Unforeseen events – terrorism and natural disasters

 

Despite all these factors, the global forex market is more stable than stock markets; exchange rates change slowly and by small amounts.

What are the advantages of the forex market?

The forex market has many advantages. These include the following:

  • It’s already the world’s largest market and it’s still growing quickly

  • It makes extensive use of information technology – making it available to everyone

  • Traders can profit from both strong and weak economies

  • Trader can place very short-term orders – which are prohibited in some other markets

  • The market is not regulated

  • Brokerage commissions are very low or non-existent

  • The market is open 24 hours a day during weekdays

 

What is MetaTrader?

MetaTrader is a platform provided by MetaQuotes Software that allows online trading in the CFD, Futures and forex markets. The software is licensed to Digital Dreams Technologies for your convenience. There are two types of platforms known in the trading world today MT5.

 

What is a pip?

Price moves in Forex trading are counted in pips or pipettes, but what does this mean? Pips and pipettes are smallest units of change in an exchange rate, pip is equivalent to a change of 1 in 4th decimal place, and pipette is 1/10th of a pip.

 

How to read a forex chart?

Learn about the different types of price charts – line, bar and candlesticks charts to better understand the information represented in this form. Assess market conditions such as buying/selling pressure, highs and lows of the price during the given time frame directly by analysing the graphs. Get to know important graphical analysis patterns and their meaning to become a better trader.

 

Technical analysis

Technical analysis is an important factor in making smart trading decisions, whether you’re trading forex, commodities, stocks or indices. Find out more about the tools and techniques you need to understand and analyse live charts so that you stand the best possible chance of succeeding in the markets.

 

What is Leverage Trading?

Leverage trading, also known as margin trading, describes the process that allows the trader to open positions investing only a fraction of the position price, while borrowing funds from the broker to cover the rest. Leverage is expressed as a ratio between total position worth and trader’s investment (i.e. 200:1) while margin appears as a percentage if the entire position worth that the trader invests (0.5% for the same case). Leverage trading can boost trader’s profits, but simultaneously increases the associated risks.