What is the Foreign Exchange market?
The Forex (Foreign Exchange Market or FX market) is the financial market of cross-currency, a market in which a currency is exchanged for another currency.
Forex trading is the buying and selling of currency crosses for speculative purposes, therefore to obtain profits. The foreign exchange market is the market through which individuals, companies, and/or institutions can convert one currency into another.
In this article, you will deeply understand what Forex is, how it works, and the most important characteristics of this market. CFD trading is much better suited to the currency market than other markets. In this guide, you will better understand why. And therefore, you will understand why Forex trading is the type of trading chosen by the majority of people.
What is a foreign exchange market and how it works
Forex or foreign exchange markets allow citizens, businesses, and institutions worldwide to exchange one currency for another. So Forex trading is primarily a means of making the global economy work since it allows transactions between people from countries that adopt different currencies. But you yourself already know that the currency market is also something else. It is the most suitable market in the world to speculate, and therefore to make short and very short term trading to obtain profits. To understand what forex is, you need to know that there is no reference stock exchange for currencies. Currencies are exchanged through brokers, dealers, and banks. There is basically no "official site" where transactions are conducted. Prices are created from the set of transactions that intermediaries such as brokers and banks, carry out. Transactions lead to the "creation" of the price of all currency pairs at a given time.
Now let's focus on these three words: "currency pairs." Currencies are traded in pairs.
For example, if you "buy" the EUR / USD cross, it means that you are exchanging euros and dollars, or rather you are buying euros, and at the same time, you are selling dollars. In other words, do you believe that the euro will appreciate in the future while the dollar will depreciate (or that the euro will appreciate more than the dollar) to gain from these currency movements?
The first currency of an FX cross is called a certain currency. The second currency of an FX cross is called the uncertain currency. The listing of a pair (or cross) shows "how much 1 unit of a certain currency is worth in terms of uncertain currency." For example, if the EUR / USD exchange rate is 1.10, it means that € 1 is worth $ 1.10. If the cross increases, then it means that the euro is gaining value against the dollar. Conversely, if the cross decreases, it means that the dollar is gaining value against the euro. Any cross on CFDs is quoted with two prices: money and letter.
The six characteristics to understand what forex is:
Now let's move on to the description of the main characteristics of this market.
Features that are unique and that make the Foreign Exchange Market the most loved market by traders all over the world. There are six characteristics for which the currency market is the best in the world for trading. Let's begin!
Open 24 hours a day, five days a week
The currency market is open 24 hours a day, from Monday to Friday. Due to its unique peculiarity of not having an official exchange on which exchanges take place, this market is available to traders’ 24 hours a day.
This means that you can open a trading position or liquidate one at any time of the day you prefer. And it's no small detail.
It is the largest and most liquid financial market in the world
What is forex? Some would answer, "It is the largest financial market in the world."
With its trading volume of over $ 5 trillion per day, the FX is by far the largest financial market in the world. In this market, there is the largest number of daily transactions in the world, both in terms of quantity and volume. It is also the market in which the largest number of operators operates every day.
So FX is also the most liquid market in the world: you will always find a seller for every buyer. It is too large a market to have liquidity problems.
It is the most volatile financial market in the world (and the most suitable for trading)
It is the fact that short-term and very short-term trading are more suitable for trading on volatile financial assets than for fairly stable assets. Think about it.
If an asset moves little over time, it is certainly more suitable for investment. That is, it is suitable for keeping a certain amount of money invested for several years.
But such a stable asset can never be suitable for short and very short term operations because its stability makes it difficult to make money on short and very short term price movements.
Here, the main reason forex trading is so successful is this: it operates on the most volatile financial market?
It is the most suitable for short and very short term trading.
The volatility is given precisely by the characteristic of which we spoke previously. The huge amount of operators and the volumes of daily exchanges mean that cross-currency, especially those of very well-known currencies, can move quickly even in a short time.
And this represents a fantastic opportunity to earn with short and very short term trading!
For completeness, it must be said that the foreign exchange market has been the most volatile market for many decades. Basically, since the end of the Bretton Woods agreements until 2016, there has been no history: it has been the most volatile market in the world. In the last few years, however, the currency market has lost the most volatile market throne in favor of a totally new market i.e., cryptocurrencies.
The currency market is very well suited to technical analysis
The technical analysis is the study of a financial asset's graph to determine an advantageous price of entry or exit from a trade. You will find many technical analysis concepts that you can consult for free when you want. The FX is the market that best fits the graphical concepts of technical analysis. This is another direct consequence of the enormous volume of daily exchanges, which makes technical analysis more valid than other less traded and liquid assets.
Forex is a market that adapts very well to the fundamental analysis of the broad scope
The fundamental analysis of a financial asset is concerned with understanding the real reason why the asset moves in one way and not in another is. Therefore, the fundamental analysis is not based on the graphs but on the fundamental, real reasons that cause the movement of an asset. FX is influenced by fundamental, far-reaching analysis, that is, that which is based on the present and future of a country's economy.
In fact, a currency is primarily influenced by the monetary policy behavior of the central bank of reference. But the attitude of a country's central bank is linked to the performance of the economy. The currencies are influenced by the performance of a country's economic indicators such as inflation, GDP, employment, consumption, a country's fiscal policies, and much more. This fundamental analysis can be definitive of "wide-ranging" and is the one that we talk about on the Euro Dollar forecast page precisely because it is the one connected to currencies.
CFD brokers allow you to trade at very advantageous conditions
Here we are focusing on trading about two financial instruments: CFDs and cryptocurrencies. One of the reasons why we focus heavily on forex CFDs is because the CFD brokers you can trade on offer much more favorable FX trading conditions than other assets such as stocks or indices.
But which CFD broker to use for trading?
The best broker for trading on FX CFDs is the IQ option!
IQ Option is the best broker in the world to trade on FX CFDs since you can enjoy the lowest commissions ever, and you can trade on a super intuitive and professional graphical analysis platform.
The initials of the most important currencies
To fully understand what forex is, you must know the abbreviations of the most important currencies. Here they are:
- USD: US dollar
- EUR: Euros
- GBP: Pound Sterling
- JPY: Yen
- CAD: Canadian dollar
- AUD: Australian dollar
- CHF: Swiss Franc
- NZD: New Zealand dollar
Why focus only on forex?
There are many private traders who trade CFDs with other assets underlying them, for example, individual stocks.
You should not consider individual stocks, indices, and commodities as optimal assets for trading CFDs, for two simple reasons:
1. The first reason is that it often makes more sense for other assets to act according to long-term logic than short-term ones.
For example, the shares are more than all the assets that should be bought because it is believed in the company's intrinsic value, not for short-term price fluctuations, which are very difficult for stocks to predict, more difficult than for other assets.
In short, the analysis of value investing, or the analysis that aims to understand the real value of an asset works much better on shares. But value investing is very difficult to do for the short/medium term. Value investing is much better suited to the long term; therefore, investment.
2. The second reason is that although the technical analysis also applies to other assets such as stocks or bonds, these assets are decidedly less technical than the currency market.
This is because they are less volatile.
It is clear that a single share is important, and it will be less and less betrayed compared to a currency cross. So it will be less volatile, and consequently, it will be less "technical" and less suitable for short term trading. In general, assets such as stocks and bonds are much more suitable for investors, and for the creation of portfolios to be kept in the long term. A separate discussion deserves trading on raw materials and precious metals.
Commodities and precious metals are more suitable for short-term trading than stocks or bonds. But they are still less suitable for short-term trading than FX.
For this reason, although it is not an asset on which we do not advise you to operate. However, many concepts, such as technical analysis, are actually also useful for trading on other types of assets.
- Forex trading is the buying and selling of currency crosses for speculative purposes, therefore to obtain profits
- There is no reference exchange for currencies. Currencies are exchanged through brokers, dealers, and banks
- You can trade on currency pairs. The first currency of a pair is called a certain currency. The second is called uncertain currency. The listing of a pair (or cross) shows "how much 1 unit of a certain currency is worth in terms of uncertain currency."
- The six characteristics to understand what forex are:
1) Open 24 hours a day, five days a week
2) It is the largest and most liquid financial market in the world.
3) It is the most volatile financial market in the world (and therefore the most suitable for trading)
4) It is a market that adapts very well to technical and fundamental analysis of the broad scope
Author: Vicki Lezama