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What is Forex Trading?

TABLE OF CONTENTS

What is Forex Trading?

What is Forex Trading?

Vantage Updated Updated Tue, January 31 12:28

Forex trading has been around since the 1970s but with the advancement of technology, and the advent of online trading platforms across the years, its popularity has been growing exponentially. This can be evidenced by the topic of Forex peaking in popularity globally every year according to Google Trends [1].  

In Australia, the currency transitioned to a free-floating system in 1983, and since then, it has risen to become one of the top five most traded currencies globally [2]. The allure of the currency can also be attributed to the “3Gs”: geology, geography, and government policy. Australia’s rigorous regulatory framework further accentuates the prominence of forex trading, guaranteeing transparency and equity for all traders, whether institutional or individual. 

As interest in Forex trading continues to grow, this article will serve as an introductory guide for new aspiring traders.  

What is Forex?  

So, let’s begin with a simple question, what is Forex?   

Forex (FX) is short form for foreign exchange which represents the global currency markets. There is an array of entities that participate within the FX markets, and they include central banks, financial institutions, hedge funds, and individual investors or traders [3].  

Hence, Forex trading refers to market participants buying or selling different currencies mostly to seek monetary gain. Through the fluctuations in exchange rates, market participants will speculate if one currency will increase or decrease in value compared to another.   

Even though there are more than 160 official currencies globally, only 4 are widely traded [4]. These currencies are:  

  • US Dollar (USD)  
  • Great British Pound (GBP)  
  • Japanese Yen (JPY)  
  • Euro (EUR)  

Why Trade Forex?  

As the largest financial market in the world in terms of trading volume, liquidity, and value, the FX market provides countless of trading opportunities for traders to take advantage of. Here are some of the reasons to trade Forex: 

  1. Liquidity 

Through the years, the total value of the FX market has been increasing with no signs of stopping. As of 2022, the average daily trade volume is USD$6.6 trillion. The increasing liquidity equates to quicker and easier transactions with low spreads for traders [5].  

  1. Round the Clock Trading 

The trading hours of the FX markets is another good reason to be trading Forex. Open for 24 hours throughout all 5 weekdays, this gives traders the convenience to select a timing suitable for them. The ability to both buy and sell also allows for increased trading opportunities under various market conditions. Not only can traders take advantage on the rising currency prices, we can also make a winning trade by selling when one currency depreciates against another [6].  

  1. Leverage 

Last but not least, you can employ leverage when trading forex in order to make larger trades with a smaller amount of capital. When used properly, coupled with adequate risk-management tools, leverage can potentially magnify your returns. However, you should keep in mind that leverage works as a double-edged sword, which could also lead to great losses [7].   

Interested in trading with some of the best conditions a broker can offer? Vantage offers forex spreads from as low as 0.0, with $0 deposit fees. Sign up with a demo account here.  

When Can You Trade Forex?  

The FX markets are available 24 hours a day, open 5 days of the week. Each day is dissected into four major sessions; Sydney, Tokyo, London, and New York. Table 1 below goes into the specific opening and closing timings for each respective session.   

Session  Open Timing (UTC / GMT +0)  Closing Timing (UTC / GMT +0) 
Sydney  0800 1700 
Tokyo  1200 2100 
London  2000 0500 
New York  0100  1000 
Table 1 – Forex Market Session Timings [8] 

Traders would usually correlate the session timings to the currency pairs they trade. For example, if one were to trade the pair USD/JPY, the Tokyo or New York session would fit perfectly.   

How does Forex Trading Work? 

Forex trading involves you (a trader) exchanging one currency for another, aiming to make potential returns from fluctuations in their relative values. Examples of currency pairs you can trade include AUD/USD and USD/JPY

When you buy a currency pair, you are effectively buying one currency and selling the other. If the currency you’ve purchased strengthens compared to the one you’ve sold, you’ll earn a profit. However, if the currency you bought weakens against the one you sold, you’ll incur a loss. 

Who Participates in the Forex Market? 

Engaging in the forex market means interacting with a diverse array of participants. Here are some of the major institutions and traders in the forex market space: 

Banks: These financial institutions are pivotal, engaging in trades both for their own portfolios and on behalf of their clientele. The bank vast resources and deep market insights often make them market movers, influencing currency values and trends. Additionally, banks provide liquidity to the market, ensuring that trades can be executed quickly and efficiently.  

Commercial companies: Companies involved in international trade use the forex market to pay for goods and manage currency risks. For instance, a German company buying American parts and selling products in China might exchange currencies multiple times, and even make advance currency deals to protect against unpredictable currency changes. 

Hedge funds: These are funds that engage in currency trade through professional portfolio managers. These managers buy and sell currencies for international trading and may also engage in speculative trades to boost their returns. 

Central banks: The official financial bodies of nations, central banks help control their country’s money value using different methods, like changing interest rates. They might also buy or sell their own currency to help their economy or manage inflation. These actions give important clues to people trading in foreign currencies. 

Individual traders: These are private participants, like yourself, who engage in currency trading with the objective of realizing a profit from market fluctuations. 

Forex Trading Terms 

  1. Pip 

A pip, short for “point in percentage,” is the tiniest price movement in a currency pair. It indicates whether a trade has gained or lost value. For instance, a one-pip move happens if EUR/USD shifts from 1.2000 to 1.2001. Most currency pairs measure a pip at the fourth decimal, but the Japanese yen uses two decimals, like USD/JPY at 86.51. 

  1. Lot 

A lot refers to a standardised measure of the amount of forex that is ready for trading. The size of the lot can varies depending on the market and asset being traded but it generally represents a specific number of units of the asset. When you buy or sell a lot, you’re trading that specific number of units of the asset. 

  1. Leverage 

Leverage allows you to use borrowed funds from the broker to increase your trading size. It is usually used to magnify your purchasing power (trade size) using a lesser amount of starting capital. While leverage can be used to amplify the potential return, it can also amplify the potential losses incurred. With Vantage, you can utilise leverage up to 30:1.     

  1. Margin 

Margin refers to the amount of money you must deposit with your broker before initiating any open position in the market. This deposit acts as a security deposit, showing the broker that you can cover potential losses from the trade. 

  1. Spread 

The spread represents the difference between an asset’s bid and ask prices. The bid is the highest price a buyer is willing to pay for the asset, while the ask is the lowest price a seller is willing to accept for the asset. 

Why Trade with Vantage 

Choosing to trade with Vantage offers traders numerous advantages. The Vantage platform is user-friendly, permitting you to trade over 1,000 different instruments no matter your location, with the Vantage comprehensive trading platform and mobile app. This ensures that you can respond rapidly to market news and execute trades promptly. 

Boasting unparalleled technology, Vantage ensures swift trade executions. Our dedicated 24/5 customer support team stands ready to assist at all times. Furthermore, Vantage provides a competitive spread starting at 0.0, ensuring your trades are cost-efficient. 

Open a live account with Vantage today to leverage these benefits and secure a competitive edge in the markets. 

References

  1. “What is forex – Google Trends”. https://trends.google.com/trends/explore?cat=7&q=what%20is%20forex  . Accessed 31 Jan 2023 
  2. “The Australian Dollar: Thirty Years of Floating – Reserve Bank of Australia”. https://www.rba.gov.au/speeches/2013/sp-gov-211113.html . Accessed 27 Sept 2023 
  3. “Forex Market: Who Trades Currencies and Why – Investopedia”. https://www.investopedia.com/articles/forex/11/who-trades-forex-and-why.asp  . Accessed 31 Jan 2023 
  4. “All currencies of all countries – WorldData.info”. https://www.worlddata.info/currencies/ . Accessed 31 Jan 2023 
  5. “Forex Trading Statistics – Compare Forex Brokers”. https://www.compareforexbrokers.com/forex-trading/statistics/ . Accessed 31 Jan 2023 
  6. “Why trade forex – Forex.com”. https://www.forex.com/en/education/education-themes/trading-concepts/why-trade-forex/ . Accessed 31 Jan 2023 
  7. “Why Is Forex Popular – My Trading Skills”. https://mytradingskills.com/forex-for-beginners/why-do-people-trade-forex . Accessed 31 Jan 2023 
  8. “Forex Market Hours – Babypips”. https://www.babypips.com/tools/forex-market-hours . Accessed 31 Jan 2023  

Disclaimer: The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our client. No representation or warranty is given as to the accuracy or completeness of this information and therefore it shouldn’t be relied upon as such. Any research provided does not have regard to specific financial situations, needs or investment objectives. Vantage accepts no responsibility for any use that may be made of these comments and for any consequences that result. Consequently, any person acting on it does so entirely at their own risk. We advise any readers of this material to seek professional advice where necessary. Without the approval of Vantage, reproduction or redistribution of this information isn’t permitted.

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