Forex (fx) definition

Gordon Scott has been an active investor và technical analyst of securities, futures, forex, và penny stocks for 20+ years. He is a thành viên of the sydneyowenson.com Financial Review Board & the co-author of Investing to lớn Win. Gordon is a Chartered Market Technician (CMT). He is also a thành viên of ASTD, ISPI, STC, & MTA.

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What is Forex (FX)?

Forex (FX) refers khổng lồ the global electronic marketplace for trading international currencies & currency derivatives. It has no central physical location, yet the forex market is the largest, most liquid market in the world by trading volume, with trillions of dollars changing hands every day. Most of the trading is done through banks, brokers, and financial institutions.


The forex market is open 24 hours a day, five sầu days a week, except for holidays. The forex market is open on many holidays on which stochồng markets are closed, though the trading volume may be lower.


Forex (FX) market is a global electronic network for currency trading.Formerly limited khổng lồ governments & financial institutions, individuals can now directly buy & sell currencies on forex.In the forex market, a profit or loss results from the difference in the price at which the trader bought and sold a currency pair.Currency traders do not giảm giá khuyến mãi in cash. Brokers generally roll over their positions at the kết thúc of each day.

Understanding Forex

Forex exists so that large amounts of one currency can be exchanged for the equivalent value in another currency at the current market rate.


Some of these trades occur because financial institutions, companies, or individuals have sầu a business need lớn exchange one currency for another. For example, an American company may trade U.S. dollars for Japanese yen in order khổng lồ pay for merchandise that has been ordered from nhật bản và is payable in yen.


A great khuyễn mãi giảm giá of forex trade exists lớn accommodate speculation on the direction of currency values. Traders profit from the price movement of a particular pair of currencies.


Forex Pairs và Quotes

Currencies being traded are listed in pairs, such as USD/CAD, EUR/USD, or USD/JPY. These represent the U.S. dollar (USD) versus the Canadian dollar (CAD), the triệu Euro (EUR) versus the USD, & the USD versus the Japanese Yen (JPY).


There will also be a price associated with each pair, such as 1.2569. If this price was associated with the USD/CAD pair it means that it costs 1.2569 CAD lớn buy one USD. If the price increases to lớn 1.3336, it now costs 1.3336 CAD khổng lồ buy one USD. The USD has increased in value (the CAD has decreased) as it now costs more CAD to buy one USD.


Forex Lots

In the forex market, currencies trade in lots called micro, mini, and standard lots. A micro lot is 1,000 units of a given currency, a mini lot is 10,000, and a standard lot is 100,000.


This is obviously exchanging money on a larger scale than going khổng lồ a ngân hàng to lớn exchange $500 to take on a trip. When trading in the electronic forex market, trades take place in blocks of currency, and they can be traded in any volume desired, within the limits allowed by the individual trading tài khoản balance. For example, you can trade seven micro lots (7,000) or three mini lots (30,000), or 75 standard lots (750,000).


How Large Is the Forex?

The forex market is chất lượng for several reasons, the main one being its kích thước. Trading volume is generally very large. As an example, trading in foreign exchange markets averaged $6.6 trillion per day in 2019, according khổng lồ the Bank for International Settlements (BIS). This exceeds global equities (stocks) trading volumes by roughly 25 times.


The largest foreign exchange markets are located in major global financial centers including London, Thành Phố New York, Singapore, Tokyo, Frankfurt, Hong Kong, và Sydney.


How to lớn Trade in Forex

The forex market is open 24 hours a day, five days a week, in major financial centers across the globe. This means that you can buy or sell currencies at virtually any hour.


In the past, forex trading was largely limited lớn governments, large companies, và hedge funds. Now, anyone can trade on forex. Many investment firms, banks, và retail brokers allow individuals to open accounts and trade currencies.


When trading in the forex market, you"re buying or selling the currencyof a particular country, relative sầu to lớn another currency. But there"s no physical exchange of money from one buổi tiệc ngọt to another as at a foreign exchange kiosk.


In the world of electronic markets, traders are usually taking a position in a specific currency with the hope that there will be some upward movement and strength in the currency they"re buying (or weakness if they"re selling) so that they can make a profit.


A currency is always traded relative sầu khổng lồ another currency. If you sell a currency, you are buying another, và if you buy a currency you are selling another. The profit is made on the difference between your transaction prices.


Spot Transactions

A spot market giảm giá khuyến mãi is for immediate delivery, which is defined as two business days for most currency pairs. The major exception is the purchase or sale of USD/CAD, which is settled in one business day.


The business day excludes Saturdays, Sundays, & legal holidays in either currency of the traded pair. During the Christmas and Easter season, some spot trades can take as long as six days khổng lồ settle. Funds are exchanged on the settlement date, not the transaction date.


The U.S. dollar is the most actively traded currency. The lỗi is the most actively traded counter currency, followed by the Japanese yen, British pound, & Swiss franc.


Market moves are driven by a combination of speculation, economic strength & growth, và interest rate differentials.


Forex (FX) Rollover

Retail traders don"t typically want khổng lồ take delivery of the currencies they buy. They are only interested in profiting on the difference between their transaction prices. Because of this, most retail brokers will automatically "roll over" their currency positions at 5 p.m. EST each day.

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The broker basically resets the positions và provides either a credit or debit for the interest rate differential between the two currencies in the pairs being held. The trade carries on and the trader doesn"t need to deliver or settle the transaction. When the trade is closed the trader realizes a profit or loss based on the original transaction price and the price at which the trade was closed. The rollover credits or debits could either add to lớn this gain or detract from it.


Since the forex market is closed on Saturday and Sunday, the interest rate credit or debit from these days is applied on Wednesday. Therefore, holding a position at 5 p.m. on Wednesday will result in being credited or debited triple the usual amount.


Forex Forward Transactions

Any forex transaction that settles for a date later than spot is considered a forward. The price is calculated by adjusting the spot rate khổng lồ trương mục for the difference in interest rates between the two currencies. The amount of adjustment is called "forward points."


The forward points reflect only the interest rate differential between two markets. They are not a forecast of how the spot market will trade at a date in the future.


A forward is a tailor-made contract. It can be for any amount of money & can settle on any date that"s not a weekover or holiday. As in a spot transaction, funds are exchanged on the settlement date.


Forex (FX) Futures

A forex or currency futures contract is an agreement between two parties lớn deliver a phối amount of currency at a set date, called the expiry, in the future. Futures contracts are traded on an exchange for mix values of currency and with mix expiry dates.


Unlượt thích a forward, the terms of a futures contract are non-negotiable. A profit is made on the difference between the prices the contract was bought & sold at.


Most speculators don"t hold futures contracts until expiration, as that would require they deliver/settle the currency the contract represents. Instead, speculators buy and sell the contracts prior to lớn expiration, realizing their profits or losses on their transactions.


How Forex Differs from Other Markets

There are some major differences betweenthe way the forex operates & other markets such as the U.S. stochồng market operate.


Fewer Rules

Thismeansinvestors aren"t held to lớn as strict standards or regulations as those in the stoông chồng, futures oroptionsmarkets. There are noclearinghousesand no central bodiesthat overseethe entire forex market. You can short-sell at any time because in forex you aren"t ever actually shorting; if you sell one currency you are buying another.


Fees and Commissions

Since the market is unregulated, fees and commissions vary widely amuốn brokers. Most forex brokers make money by marking up the spread on currency pairs. Others make money by charging a commission, which fluctuates based on the amount of currency traded. Some brokers use both.


Full Access

There"s no cut-off as to when you can and cannot trade. Because the market is open 24 hours a day, you can trade at any time of day. The exception is weekends, or when no global financial center is open due to lớn a holiday.


Leverage

The forex market allows for leverage up lớn 50:1 in the U.S. & even higher in some parts of the world. That means a trader can open an account for $1,000 & buy or sell as much as $50,000 in currency. Leverage is a double-edged sword; it magnifies both profits & losses.


Example of Forex Transactions

Assume a trader believes that the EUR will appreciate against the USD. Another way of thinking of it is that the USD will fall relative sầu to lớn the EUR.


The trader buys the EUR/USD at 1.2500 & purchases $5,000 worth of currency. Later that day the price has increased to lớn 1.2550. The trader is up $25 (5000 * 0.0050). If the price dropped to lớn 1.2430, the trader would be losing $35 (5000 * 0.0070).


About the Rollover

Currency prices move constantly, so the trader may decide to lớn hold the position overnight. The broker will rollover the position, resulting in a credit or debit based on the interest rate differential between the Eurozone và the U.S. If the Eurozone has an interest rate of 4% and the U.S. has an interest rate of 3%, the trader owns the higher interest rate currency in this example. Therefore, at rollover, the trader should receive sầu a small credit. If the EUR interest rate was lower than the USD rate, the trader would be debited at rollover.


Rollover can affect a trading decision, especially if the trade could be held for the long term. Large differences in interest rates can result in significant credits or debits each day, which can greatly enhance or erode profits (or increase or reduce losses) of the trade.


Most brokers provide leverage. Many U.S. brokers leverage up to 50:1. Let"s assume our trader uses 10:1 leverage on this transaction. If using 10:1 leverage the trader is not required to lớn have $5,000 in an account, even while trading $5,000 worth of currency. Only $500 is needed.


In this example, a profit of $25 can be made quite quickly considering the trader only needs $500 or $250 of trading capital (or even less if using more leverage). That shows the power of leverage. The flip side is that the trader could thất bại the capital just as quickly.


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The offers that appear in this table are from partnerships from which sydneyowenson.com receives compensation.
The right hvà side (RHS) refers lớn the offer price in a currency pair and indicates the lowest price at which someone is willing khổng lồ sell the base currency.
A rollover credit is interest paid when a currency pair is held open overnight và one currency in the pair has a higher interest rate than the other.

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Major pairs are the most traded foreign exchange currency pairs. There are four major pairs based on the USD, EUR, JPY, GBPhường, and CHF.
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