The world of finance revolves around currencies. Each country has a unique currency that you would use if you visit that country. Most travellers are familiar with the act of exchanging their own currency for that of the country they are visiting. When exchanging money for personal use, you would visit a bank or an exchange office, however, when you are trading or buying and selling currencies you would do this in the Foreign Exchange market, or better known as Forex.
So, Forex is a market?
When discussing the investor or trader part of exchanging currencies you are always referring to the Forex. So, technically, yes Forex is a market. Forex is, in fact, one of the biggest trading markets, with around $4.3 trillion USD in daily volume. That is a staggering number, but it does make sense that trading of all currencies in the world would draw so many people from around the world. Forex market draws in every type of individuals, businesses, corporations and even some countries.
The Forex market is favourable for investments for many reasons, ranging from:
- Low Entry Point: partaking in the forex market does not require a large upfront investment.
- Commission Free Trade: investors are only responsible for the pairing costs, and will not be charged a further commission when buying a position.
- Simpler and Easier to Use: compared to binary options and stocks trading, the forex market is much easier to follow and invest in. The same level of commitment, at half the time researching. You can hone in on the currencies you want to trade, rather than having to keep up with the entire market.
- Leverage Trading: forex pairings are considered a leveraged product, so you can trade on a margin. Whatever the margin is, i.e. 5:1, you will be responsible for paying the cost of the stock, CFD, or forex pairing at the margin of 5:1. So pairing that might require 50$ to trade can be bought at $10, or 1/5th of the asking price.
- No Directional Restrictions: Forex market allows of profiting from both increase and decrease on the value of the currency.
- 24-Hour Market: Forex market does not close. While one part of the world is asleep, the other side is awake and trading, meaning you can buy a position at any time of the day.
How Do I Join?
Partaking in the Forex market can seem confusing but is actually quite easy. The abbreviated name system confuses first-time viewers, but after familiarizing yourself with the names of each country’s currency and its abbreviation, Forex trading is a breeze. Each Forex pairing is written as UUU/EEE, meaning you will need X amount of UUU currency to buy Y amount of the EEE currency. In a real-world example, let’s use the United States Dollar or USD and the Japanese Yen or JPY.
To calculate the exchange rate of a currency to another, you place X currency or JPY against the Y currency or USD. When you look at your first pairing, this is what you will see, JPY/USD. As of August 10, 2020, the exchange rate for 1 United States Dollar is 106.76 Japanese Yen. Meaning, you will need 106.76 JPY to buy 1 USD. So, the value of this pairing of JPY/USD is 106.76 JPY.
Currency pairs usually only move in 50 to 100 pips a day. PIP is the 4th decimal place in the currency pairing. Most currencies make small movements, however, it is important to remember that volatility of a currency and its country can cause extreme rises and falls in the value of said currency against the stronger currencies like the USD and Euro.