Markets Intro

Introduction To Forex Trading

The forex market is the world’s biggest financial market. It has a daily liquidity that can reach trillions of dollars. Traders use one currency to buy another, looking for opportunities to profit as each currency continually changes in value. The value of national currencies is affected by economic events like the release of GDP or employment figures, or geopolitical events like wars or natural disasters.

When traders invest on currencies, the assets are always shown in pairs e.g. EURUSD (euro and US dollar). Some pairs are known for having greater volatility, partly due to differences in interest rates for each currency. The global forex markets can be highly volatile and sometimes unpredictable.

What affects Forex values?

The forex markets are in a state of constant flux, often currencies will move within predictable boundaries, but sometimes economic and political events can start powerful new trends. These events can include interest rate decisions, electoral results and government decisions. A well known example was on the 16th September 1992 when the UK crashed out of the ERM (European Exchange Rate Mechanism) and GBPUSD fell 25% in the months that followed. A more positve event was the massive RCEP trade deal on the 15th November 2020. Forex traders depend on accurate analysis to anticipate changes in currency prices.

Size

The global forex markets are currently built around eight core currencies and are dominated by major players like national banks and hedge funds. The daily trading volume usually reaches trillions of dollars. CFD trading gives ordinary traders easy access to this massive market.

Margin

Most brokers offer leverage to forex traders, allowing them to trade with the brokers money and increase the size of their forex trades. The margin requirement is a cash reserve that you need in order to open leverages positions.

Value

When you trade two currencies they are always displayed as a pair e.g. EURUSD (euro and US dollar). The left hand currency – in this case the euro – is the ‘base currency’. The right hand currency – in this case the US dollar – is the ‘counter currency’.


The relative value of the two currencies will continually change. If you think that the base currency – euro – is going to gain against the counter currency – US dollar – you would buy the pair. If you thought that the reverse would happen and the dollar would gain against the euro, you would sell the pair. Traders use a combination of technical and fundamental analysis to try and predict changes to currency values. They can also apply stop loss and take profit to any open position.

EUR/USD (The value of 1 EUR expressed in US dollars)

USD/CHF (The value of 1 USD expressed in Swiss francs)

An Example Forex Trade

A trader opened a position $65,000 on the GBPUSD at 1.2920 on 03-11-2020, using 1:140 leverage. He expected the British pound to rise against the US dollar. The trader closed the position on 05-11-2020 when the GBPUSD reached 1.3120. The trader earned a profit of $1,400 on the position.