What is the forex market for beginners? Foreign exchange (also known as forex) refers to the global over-the-counter market in which traders, investors, institutions and banks exchange, speculate, buy and sell the world’s currencies.
What is the forex market for beginners?
Trading takes place in the “interbank market”, which is an online channel through which currencies are traded 24 hours a day, five days a week, and the forex market is one of the largest trading markets, as it is estimated that the daily trading volume in This market exceeds $5 trillion worldwide.
The value of currency trading deals in the forex market for beginners is usually in the millions, so having a small spread between the bid and ask prices (that is, by a few pips) can make a big profit in a short period of time. Of course, such large trading volumes mean that a small spread can mean huge losses.
Trading deals and the most important terms
“Position” is the term used to describe an ongoing trade. A true long position means that a trader has bought a currency with the expectation that its value will increase, and once the trader sells that currency back to the market (ideally at a price higher than the price paid), his position is said to be “closed” and the transaction is complete.
A short position refers to a trader who sells a currency in the expectation that it will depreciate in the forex market for beginners, and plans to buy it back at a lower value. forex market for beginners short position is “closed” as soon as the trader buys back the asset again (ideally the buy-back is at a price lower than the price at which it was sold).
If the EUR/USD is trading at 1.0916/1.0918, then the investor who is looking to open a real long position on the euro will buy 1 euro for 1.0918 dollars, then hold the euro in the hope that its value will rise, to sell it to the market at a profit once its price rises.
An investor who opens a short euro position will sell 1 euro for 1.0916 US dollars. This trader expects the euro to depreciate, and plans to buy it back at a lower price if it does.
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What are the most traded currency pairs in the forex market?
There are seven major currency pairs in the forex market for beginners. There are also other categories of currency pairs including derivative currency pairs and exotic currency pairs, which are less common in trading, and all of them are relatively illiquid (meaning that they are not easy to exchange for liquid cash).
Major pairs
The major pairs are the most commonly traded, and they contribute about 80% of the trading volume in the forex market. These pairs usually have low volatility and high liquidity.
These currencies are associated with stable, well-managed economies, are less prone to manipulation, and have lower spreads than other currency pairs.
Derivative currency pairs
Cross currency pairs – these are pairs that do not include the US dollar. Derivative currency pairs used to be converted first to US dollars, then to the desired currency, but now the conversion is direct.
As for the most traded derivative pairs, they are those derived from minor currencies (such as EUR/GBP, EUR/JPY, GBP/JPY), and these pairs are usually less liquid and more volatile than the major currency pairs.
Exotic currency pairs
Exotic currencies are currencies from smaller or emerging economies that are in the same pair as a major currency.
Exotic pairs carry a higher amount of risk when compared to major and derivative pairs, as they are less liquid, more volatile and more prone to manipulation.
The price spread of these pairs also widens, and they are more sensitive to sudden changes in light of political and financial developments.
