What is the foreign exchange market?
The foreign exchange market is the largest financial market in the world, with a trading value of more than $ 4 trillion in trading volume every day, of which small trades of forex brokers are approximately $ 1.5 trillion. The market is really big compared to the $ 74 billion of the world's largest stock market, the New York Stock Exchange (NYSE). The foreign exchange market operates constantly for 24 hours a day, 5 days a week from Monday to Friday. The day starts trading in New Zealand and continues through other time zones.
What is Forex trading?
Forex trading is simply selling a currency to buy another currency. Suppose you need to spend in Japanese Yen but you only have US Dollar, you need to sell USD to buy Yen. At this point you have entered the foreign exchange market. The exchange rates between the two currencies are always changing which allows you to participate in making money in the foreign exchange market.
For the investors’ activities, foreign exchange is the same as any other investment products such as securities, commodities, etc. Due to the globalization of the world economy and the integration of economic sectors (Joint Intelligent Europe), including currency in the portfolio, will help diversify assets and reduce risk.
Like other alternative investment channel options, forex gives investors a market where one can buy or sell an investment product. Product in this case, is a specific currency pair. This currency pair may be the Euro against the Dollar, the Dollar against the Yen, the Pound against the US dollar, the Euro against the Pound, or a combination of other currency pairs.
The most liquid currencies include the US dollar, Japanese yen, British Pound, Euro and Canadian Dollar. It is estimated that trading activities in these currencies comprise more than 80% of daily trading volume.
How to recognize currency in forex?
Like stocks, currency has its own symbol to distinguish from other currencies. Usually a currency is calculated by its value compared to the value of another currency. A currency pair consists of "names" of two currencies separated by a "/". The "name" structure of the currency pair consists of three initials. The first two letters usually give the perception of a country, the last word being the first letter in the country's monetary units.
EUR = Euro
USD = US Dollar
GBP = British Pounds
JPY = Japanese Yen
CAD = Canadian Dollar
CHF = Swiss Franc (Confederatio Helvetica Franc)
NZD = New Zealand Dollar
AUD = Australian Dollar
By combining a currency together we have a currency pair, for example: EUR / USD combination, we have the EUR / USD pair
What is a base currency and a quote currency?
The base currency is the first currency in a currency symbol which always prevails in a currency pair. It is a constant currency when determining the price of a currency pair.
Quote currencies are the second currency in a currency pair.
The euro is the base currency that governs all other global currencies. Currency pairs against the EUR include: EUR / USD, EUR / GBP, EUR / CHF, EUR / JPY, EUR / CAD ... all contains the first EUR abbreviation in the series.
The British Pound is the next currency in the dominant denominator hierarchy. GBP / USD, GBP / CHF, GBP / JPY, GBP / CAD, etc except for GBP / GBP pair in which GBP is the first currency in the currency pair.
The next major currency is the US dollar. The major currency pairs against the USD are: USD / CAD, USD / JPY, USD / CHF ... Since EUR and GBP are dominant, USD is quoted as EUR / USD and GBP / USD.
When considering a foreign exchange rate (eg, EUR / USD), the action of buying currency pairs implies the purchase of base currency (EUR) and the sale of the quotecurrency (USD). If the EUR / USD moves higher, traders can sell the EUR / USD at a higher price. The difference in the exchange rate of the EUR / USD currency pair gives investors a profit.
How to calculate the value of the currency?
The basic currency is always equivalent to 1 (one) of the currencies of the exchange currency (1 Euro, 1 British Pound, 1 US Dollar). When you buy 100,000 EUR / USD, it means you sell the Dollar (quoted currency) to buy the basic amount of 100,000 euros (base currency). The quote currency is equivalent to the amount that you sell, which will fluctuate according to the exchange rate for currency pairs. It is calculated as follows:
Currency quotes = The basic amount of foreign currency x Exchange rate at the moment.
Because the quote currency is part of the currency pair, when it fluctuates higher or lower, it determines whether the two currencies in the currency pair are stronger or weaker. When the value of one currency increases, the other currency in the pair must decrease in value comparison. If the EUR / USD moves from 1.2000 to 1.2024, we can conclude that the euro strengthens, the dollar weakens.
What is Pip? How to calculate the value of pip?
Trading in the foreign exchange market means trading in currency pairs. The pair is structured as a fraction in which the smallest part is called a "pip." Pip is one of the basic units in Forex trading that measure price volatility.
For example: You trade with a maximum leverage of 1: 100 for standard accounts. When trading EUR 100,000 at the exchange rate EUR / USD = 1.2000, the method of calculating the margin requirement is as follows:
Escrow requirement = 100,000 EUR x 1.2000 / 100 = 1,200 USD.
To determine the value of the pip for the above transactions, the following calculations will be made:
Transaction Value (USD) = Exchange Rate x The base currency amount = 1.2000 x 100,000 EUR = 120,000 USD
USD value when the price drops by 1 pip = (1.2000 - 0.0001) x 120,000 EUR = $ 119,990
So the value of 1 pip = $ 120,000 USD - $ 119,990 USD = $ 10 USD
What is the leverage in forex trading?
Because of speculative reasons in general, exchanging currencies in the foreign exchange market is usually in very large quantities, so trading in this market, traders always use leverage tool. Using financial leverage in forex trading means trading a large amount of money at a much smaller amount. The higher the financial leverage, the higher the probability of higher returns, and the greater the risk. So we recommend that you choose the right leverage to match the risk tolerance you can take. At HoldingFx, we provide maximum leverage for each type of account. However, you can lower the correction if the maximum is too risky for your transaction. Leverage levels are denoted by 1:100, 1:200
In trading activities, there are buying and selling prices. The same with Forex Trading, there is a Sale and Purchase Price. Price (also known as Bid) is the price that market makers will buy. The buy price (also called Ask price) is where market makers will sell. On the contrary, for investors, the bid price is the price that an investor can sell, while the ask price is the price that an investor can buy.
Market makers are like any investor who always wants to buy at low price and sell at high price. This can refer that Bid is always lower than Ask! And the difference between Bid and Ask (Bid / Ask) is called Spread. Spread is the fee that market makers charge for retail customers. For example, Bid / Ask = 1.2050 / 1.2055. The Bid / Ask difference (Spread) is 5 pips. Depending on the state of the market, Bid / Ask fees will fluctuate with the general liquidity of currency pairs. That is the same principle that applies to HoldingFx's Bid / Ask (Spread).