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October 13, 2021

About Forex in simple words

The largest in terms of trading volume in the world is the Forex market, where the world’s largest banks, multinational corporations, and funds buy and sell currencies Forex history  The beginning of Forex history dates back to the 10th century when active trade began not only between individual countries but also between continents and the… Continue reading About Forex in simple words

About Forex in simple words

The largest in terms of trading volume in the world is the Forex market, where the world's largest banks, multinational corporations, and funds buy and sell currencies

Forex history 

The beginning of Forex history dates back to the 10th century when active trade began not only between individual countries but also between continents and the need for an equivalent exchange arose. The issue of different money in different countries, which has no confirmed value, made it necessary to introduce comparative rates of their exchange. Numerous attempts to create a system of international agreements that would suit everyone, led to the emergence in the early 19th century of the Gold Standard, when all currencies are converted into gold.                             

The end of this system was put by the First World War, for the financing of which most countries were forced to print more money than their gold and foreign exchange reserves provided. Ultimately, the explosive growth of inflation forced the leaders of the countries to suspend the convertibility of their currencies into gold.

In July 1944, at the Bretton Woods Conference, delegates from 44 countries agreed to make all currencies of the world convertible - this is how the first international monetary system was created, the task of which was to control exchange rate fluctuations and restore economic stability. In particular, the Bretton Woods agreement stipulated that only the dollar could be converted into gold at a fixed rate of $ 35 per ounce. This was due to the fact that by the end of World War II, the largest amount of gold was concentrated in the US gold and foreign exchange funds and, in fact, the US had to provide reserve funds for other states, which over time turned out to be more and more difficult and became almost impossible.

In January 1976, in Jamaica, it was decided to abandon the Bretton Woods agreement, and the final conditions for the transition to a modern international monetary system were formalized there, in which exchange rates are set not by the state, but by market demand. The foreign exchange market has become liberalized. The exchange rates began to fluctuate freely, resulting in a market with great opportunities and a name for this Forex market.

What is Forex?

The abbreviation FOReign EXchange (from the English exchange of foreign currency) served as the name and laid the foundation for the FOREX market, which is a complex system of transactions between banks, companies, brokers, stock exchanges, private investors for the purchase and sale of foreign currency, the price of which is constantly fluctuating.

Consider the roles of market participants

Central banks ensure the stability of the currency within the country, supporting its exchange rate in the external market

Commercial banks carry out basic buying or selling operations

Large companies that sell foreign exchange on Forex are called Exporters, and those that buy are Importers. Organizations engaged in foreign investment of assets. These can be large international corporations, investment funds, etc.  

Currency exchanges form currency quotes based on the actual ratio of supply and demand

Brokers provide an opportunity for private traders to have access to trading in the foreign exchange market.

And finally, individuals who, with the development of the Internet, can act as both a buyer and a seller, simply choose a broker and join the platform.  

Choosing a broker

Choosing a reliable broker and a convenient terminal for trading is the primary task of any novice trader. The main points you need to figure out before you transfer your money to a broker 

1. License. Check all available information from market regulators (CySEC, FSA, MiFID, and others) 

2. Carefully study and select the optimal conditions for the provision of services (Service Agreement). 

3. Availability of markets and financial instruments that the broker provides and whether they are right for you.

4. Study reviews of the broker on reputable sites on the Internet

5. Technical support, contacts for communication if necessary to resolve controversial issues.

6. Training and service. The broker's platform or trading terminal should be as clear and convenient as possible for you. 

7. Having a demo account will allow you to study the nuances of working with a particular broker.  

Basic concepts of forex trading 

Forex transactions are based on currency pairs. The most popular currency pairs are EURUSD, USDCHF, EURJPY, GBPUSD, USDJPY. For example, when making transactions on the EURUSD currency pair, we either buy euros for dollars or sell euros for dollars.

The currency that is in the first place in the currency pair (in our case it is EUR) is called the base currency, this is the currency with which the operation is performed, in the second one (in our case it is USD) it is called the quoted one, with the help of which the calculations take place.

The price at which we buy is called ASK, the selling price is called BID. 

The difference between them is called SPREAD - in simple words, it is a commission for a transaction. SPREAD is measured in points. 

A point is the minimum step of price change, and since quotes on Forex are carried out up to the fifth decimal place, one point is equal to 0.00001. For example, at some point in time, the price of EURUSD was 1.15000; it subsequently changed and amounted to 1.15001 - in such cases, they say that the price has changed by one point. 

The amount of currency for making purchase/sale transactions is called a lot. One lot is 100,000 units of the base currency. Thus, if we buy or sell the EURUSD currency pair with a standard volume of one lot, we need to have 100,000 euros in order to perform at least some operation. And this is a significant amount for most novice traders.

For those traders who do not have large amounts to complete transactions, the broker provides the missing amount in order for them to make transactions. The ratio between a trader's personal funds and borrowed funds from a broker is called leverage. The standard leverage is 1:100, which means that to complete a transaction, it is enough to have an amount 100 times less than the value of the lot, that is, 1,000 units of the base currency. Among other things, many brokers provide the opportunity to trade 0.1 lots and 0.01 lots, which significantly reduces the threshold for entering the Forex market and can be as low as $ 100.

Forex market advantages

24/7 work on weekdays. This is achieved due to the fact that all trading is divided into 4 trading sessions. When evening falls in one of the points of the world and trade closes there, morning comes at another point and the local foreign exchange market begins to work. Sessions go one after another or partially overlap one another, so traders can trade at a convenient time for them. It is necessary to know the schedule of trading sessions in Forex because currencies behave differently in different sessions. For example, trading in the Japanese yen activates during the Asian session, in the euro - during the European session, and the American session may greatly reduce or, conversely, strengthen the US dollar.

Huge trading volumes. Its volume can reach 3-5 trillion dollars per day, which is 10 times higher than the volume of the entire world market. 

In the forex market, it does not matter at all what happens to the price - we can buy or sell, while it is possible to make money both on the rise and the fall. Moreover, those investors who make money on a rise in prices are called Bulls, and on a decline - Bears.

High profitability. For example, the euro rate has increased by one point. For those who bet on the euro rise, this means profit and loss for those who gambled on the dollar higher. The volume of these losses and profits depends solely on the volume of the transaction - may be one dollar, or maybe a thousand. That is why the most profitable financial market in the world is the riskiest.

Various market indicators, economic news, live chats, and other technical and fundamental analysis tools help the trader to minimize risks, conduct analytics, make forecasts, and build strategies. Indicators allow you to determine the optimal time for opening and closing a deal.