What you need to know to invest in Forex trading

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What’s after this announcement

Forex, in English Foreign exchange or FX, is simply the currency market. It is a financial market where convertible currencies are traded with exchange rates that constantly vary based on supply and demand and economic, political and financial events. In terms of overall volume, it is the second largest financial market in the world after the interest rate market. Historically, the FX market has existed in this form since 1973, a form that tends to be referred to as the floating exchange rate regime.

According to a study by the Bank for International Settlements BIS, the volume of the Forex market consists of these three categories of transactions: 51% of transactions take place between financial institutions, 42% between banks and brokerage companywhile only 7% of transactions are exchanged between banks and non-financial entities such as large corporations or governments.

currency pairs

In Forex we talk about currency pairs such as the Euro / Dollar: it is a digital currency that must then be sold in currency to obtain its earnings, for example in euros. It is an over-the-counter market where speculators and investors freely trade (buy and sell) currency pairs.

To better understand the concept, it is necessary to imagine governments as companies: in this case their currencies would be shares, and in the way in which on the stock exchange we will follow the evolution trading of synthetic indices, in Forex we follow the evolution of currencies.

Take for example the EURUSD currency pair in this pair the euro is called the base currency and the US dollar the counter currency. The Forex quote is the valuation of the euro against the dollar.

If we look at this currency pair on a trading terminal, we will see two digits. The first is the ask price which corresponds to the purchase price of the euro in dollars and the second says that the bid price corresponds to the selling price of the euro in dollars. To make money in Forex, banks will buy currency and resell it at a higher cost.

However, one important nuance should be noted. In Forex, you don’t buy currency. Indeed, the currency pair is fictional, so it is a speculative market where traders speculate on price movements and developments.

Forex how it works

In a competitive and free market, prices are determined by supply and demand, and as in all financial markets, supply and demand is the key factor in the evolution of the value traded.

Each sale of a currency creates a supply surplus that pushes its price down and vice versa.

In addition to Forex, since these are real currencies, the value of currency pairs depends on other factors related to the economy of the countries that hold the currency traded such as inflation, the exchange rate economic growth where economic political events.

What are the currencies that exist in Forex?

We can divide the existing currencies on Forex into 3 categories: major currencies, minor currencies and a last group called exotic currencies.

The first group naturally brings together the most well-known and traded currencies in international trade such as the euro, dollar or pound sterling, which makes it possible to form pairs such as the EUR USD or the GBPUSD.

The second group brings together the fathers of currencies quite frequent in Forex operations, such as the Canadian dollar or the Australian. The latter group consists of other currencies and accounts for less than 10% of all foreign exchange transactions.

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