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Basic knowledge of forex

What is forex?

The forex or FX market, which is short for the foreign exchange market, is the place in which individuals, companies and governments all trade different currencies with one another. Put simply, the forex market is the marketplace where money is bought and sold.

According to Article 3 of the Regulations on Foreign Exchange Control promulgated by China in 1996, Foreign exchange refers to: (1) foreign currency, including banknotes and coins. (2) foreign currency payment voucher, including bills, bank payment vouchers, postal savings vouchers, etc. (3) foreign currency securities, including government bonds, corporate bonds, stocks, etc. (4) Special drawing rights, European currency units. (5) Other foreign currency denominated assets.

Background

The foreign exchange market is the world's largest financial market, with an average daily trading volume of US$5.3 trillion. Forex trading involves the buying of a currency and the selling of another at the same time. This means FX trading always involves currency pairs. For example, if you have US dollars (USD) and you need Japanese Yen (JPY), you have to sell the US dollars to be able to buy the Yen.

The rate of exchange between different currencies are constantly fluctuating mainly due to the supply and demand between buyers and sellers. The forex market may also be affected by high-impact events such as central bank decisions and by the release of economic data from different countries.

Which currency pairs are traded most frequently?

The most liquid currencies generally come from countries with stable domestic politics and well-respected central banks. These currencies are traded most frequently and are known as the major currency pairs. In the foreign exchange market these major currency pairs account for around 85% of the trading volume. These include EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD and USD/CAD.

Why trade Forex?

FX market is one of the largest, if not the largest investment market, therefore it is volatile and very lucrative which can potentially be profitable if you know how to take advantage of its fluctuation. Unlike the stock market with limited trading hours, the FX market has around the clock trading for 24 hours 5 days a week. In addition, when you trade FX you have the advantage of using a higher leverage that is not available for other financial investments.

What are some of the advantages that forex trading has over trading stocks and other markets?

The Forex market can be considered one of the fairest and most transparent markets in the world. There are no centralised exchanges (unlike stock exchanges), nor banks or any country that can control the whole FX market. At the same time, the large number of market participants and massive volume of trades that are being transacted on a daily basis means no single institution can manipulate the currency prices.

Forex Trading is Easy

Unlike other forms of investing, forex trading is easy to get started. When you compare what you need to get started trading forex with what you need to get started in stocks, options or futures trading, they all pale in comparison.

Forex Trading is Cheap

As you just read, forex trading doesn’t require you to deposit tens of thousands of dollars into your account just to get started. You can open an account and begin trading forex with as little as a $100 deposit.

The Ability to Trade Forex Anywhere, Anytime

Unlike your 9 to 5 day job, forex trading doesn’t restrict you to your desk or worksite. If you don’t want to be inside, then don’t be inside! Forex gives you the ability to trade anywhere, anytime. Trade wherever and whenever you want, it’s up to you.

Major global foreign exchange market

Foreign exchange market refers to the Banks and other financial institutions, proprietary traders, large multinational companies, trading markets traded in various currencies through intermediaries or telecommunications systems.

At present, there are about more than 30 major foreign exchange markets in different countries and regions throughout principal continents. According to the traditional regional division, the markets can be divided into three major markets, namely, Asia, Europe, North America, among which, the most important is Europe's London, Frankfurt, Zurich and Paris, America's New York and Los Angeles, Australia's Sydney, Asia's Tokyo, Singapore and Hong Kong etc..

The characteristics of Forex market

Unparalleled liquidity

Foreign exchange market is the most liquid market in the world with a trading volume more than $6 trillion a day, - its daily trading volume a month equivalent of Wall Street. The foreign exchange market works day and night, attracting traders to buy or sell currency all over the world.

Most popular currency pairs in forex trading

While you can trade almost any currency pair in theory, there are certain pairs that are consistently the most traded. These are called Major pairs (it’s in the name) – they make up 80% of the entire trading volume in the forex market. These major pairs are associated with stable economies and therefore offer low volatility and high liquidity. Example of major pairs include the aforementioned EUR/USD, the USD/JPY (the US Dollar and the Japanese Yen), GBP/USD (British Pound and the US Dollar) and the USD/CHF (the US Dollar and the Swiss Franc).

24-hour trading

The forex market is open 24 hours a day and 5 days a week. As one part of the world wakes up, the centre of trading focuses around that section of the globe and slowly shifts between financial centres as the day unfolds throughout the world.

Open 24 hours a day and 5 days a week, unlike stock or bond markets, the forex market doesn’t close at the end of each day. Instead, trading just shifts to different financial centres around the world. The day starts with the Sydney session and moves to Tokyo, London, Frankfurt and finally New York before it is time for Sydney to do it all over again!

A Market without Physical Markets

The financial industry in Western industrial countries basically has two systems, namely central operations for centralized trading and merchant networks without uniform fixed locations. Stock trading is bought and sold through exchanges. Like the New York Stock Exchange, the London Stock Exchange, and the Tokyo Stock Exchange, which are the main trading places of stocks in the United States, the United Kingdom, and Japan, the financial products that are centrally traded, have uniform requirements for quotation, trading time, and settlement procedures. A trade association was established and a code of practice was established. Investors buy and sell the goods they need through a brokerage firm. This is “A Market without Physical Markets”. Foreign exchange trading is conducted through a network of merchants that do not have a unified operating market. It is not like a centralized location of stock trading. However, the network of foreign exchange transactions is global and has formed an organization without organization. The market is connected with advanced information systems by means of mutual recognition. Traders do not have membership in any organization, but must obtain the same Industry trust and recognition. This kind of foreign exchange market without a unified venue is called "A Market without Physical Markets". The global foreign exchange market trades an average of $1 trillion a day. Such a huge amount of money is the completion of liquidation and transfer under the supervision of such a centralized location without a central clearing system and without the supervision of the government.

A zero-sum game

In the stock market, if a certain stock or the whole stock market rises or falls, then the value of a stock or the stock value of the entire stock market will rise or fall. For example, the price of Japan’s Nippon Steel’s stock falls from 800 yen to 400. The yen, so that the value of all Nippon Steel's stocks has also been reduced by half. However, in the foreign exchange market, the change in the amount of value represented by the fluctuation of the exchange rate is completely different from the change in the value of the stock. This is because the exchange rate refers to the exchange ratio of the two currencies, and the change in the exchange rate is also a decrease in the value of the currency. Another increase in the value of money. For example, 22 years ago, 1 dollar was exchanged for 360 yen. At present, 1 dollar is exchanged for 120 yen. This shows that the value of the yen has risen, and the value of the dollar has declined. From the total value, it will change and will not increase the value. And it will not reduce the value. Therefore, some people describe that foreign exchange trading is a "zero-sum game," or rather a transfer of wealth.

Quality and speed of execution

Forex brokers offer stable quotes and instant deals, and investors can trade in real-time market quotes, even when the market is at its peak, unable to close. In the futures market, the uncertainty of the transaction price is because all orders are combined through a centralized exchange, thus limiting the number of traders, the flow of funds and the total transaction amount at the same price. However, every quote of the forex broker is executed, that is, as long as the investor is willing, the order will be executed! There will be no such situation where the trade won’t be executed with quote in market!

No trading commission

In the futures market, in addition to the spread, investors must also pay additional commissions or fees. All financial products have a bid price and a bid price, and the difference between the bid-ask price is defined as the spread or the cost of the transaction.

No middleman

Spot foreign exchange trading, unlike stock trading, has no middleman who charges high costs. In foreign exchange trading, customers can trade directly in the foreign exchange market, and they can complete the currency trading with a simple click of the mouse, eliminating the cumbersome middleman steps and making the foreign exchange transaction convenient and worry-free.

Risk warning:Margin trading for all Forex, Precious Metals and CFD products is associated with significant risks and is therefore not suitable for all investors. Please be sure to fully understand the risks involved before trading with us. For more risk details, please see Rockfort's Risk Statement and Margin Policy.