Whats is Forex?
The global financial market of foreign currencies (Foreign Exchange Market, Forex or FX) allows easy buying and selling of foreign currencies. It is one of the largest and most liquid financial markets in which banks, central banks, financial institutions, governments, corporations, insurance companies, but also individual investors participate.
The foreign exchange market is available 24 hours a day except weekends, it is specific due to the large volume of trading, high market liquidity, global distribution, due to a large number of different factors influencing changes in currency pair prices and the ability to use the leverage effect. In such a market, profit is made by buying and selling currencies at different exchange rates.
The currencies most often traded on the foreign exchange are:
U.S. dollar,
Euro,
Japanese yen,
British pound,
Swiss franc,
Australian Dollar,
Canadian Dollar,
New Zealand Dollar.
The foreign money market is difficult to compare with other areas of the world financial markets, mostly due to the great sensitivity to numerous factors. Prices on the foreign money market are constantly changing. Changes in exchange rates are usually caused by actual cash flows, ie. the exchange rate is formed depending on supply and demand, but also exchange rates are very sensitive to news from the field of economics, politics as well as news about natural disasters. Since such a market is not centralized, the possibility of central bank influence is avoided.
Foreign money trading is available 24 hours a day, except weekends. According to our time, trading starts on Sunday at 22:00 and ends on Friday at 22:00. The main trade center is located in London, but New York, Tokyo, Hong Kong and Singapore are also important centers through which foreign money is traded. This arrangement of shopping centers enables trading 24 hours a day, trading starts in Asian centers, then trading takes over the center in London, then New York, and then Asia again.
Currency pairs
Currency pairs are traded on the foreign currency market, ie. one currency is converted into another at different prices. On such an exchange, the price of one currency pair can change its value several times within a minute. In periods of intense trading, within one minute, the price can change value dozens of times or even hundreds of times. The change in prices for most currency pairs is monitored on the fourth (0.0001), and for currency pairs where the Japanese yen is traded, price changes are monitored on the second (0.01).
Foreign exchange trading
Trading on the foreign exchange market is specific in terms of the amount traded. Changes in the exchange rate between the two currencies are generally relatively small, in some cases the price changes only to the third, fourth or even fifth decimal place. Therefore, the amounts traded should be high enough to make a profit on such small price differences. The term “Lot” refers to the amount of 100,000 units of currency traded, and the amount poisoned (Size) is usually expressed in the number of Lots invested. When trading in such a market, it is common for brokerage companies to allow investors to trade larger amounts than they have in their account, ie. to use the leverage effect. Brokerage companies usually allow Leverage in the ratio of 200: 1, which means that it is possible to open positions in which the amounts traded are up to 200 times higher than the current account balance. If the position is opened in line with price movements in the market, Leverage will significantly increase profits. However, if the price on the market moves in the opposite direction from the open position, Leverage can be the cause of large losses, therefore special attention must be paid to determining the amount to be traded.
Financial market trading is a series of operations in which one of the available currency pairs is sold or bought at the current market price. The goal of trading in such a market is to make money in exchanging currencies at different prices. One transaction (trading) on a currency pair begins with the opening of a position (in the direction of Buy or Sell) and ends with the closing of the position. Such a transaction begins with the opening of a position, ie. by exchanging a certain amount of one currency for the corresponding amount of another currency at the price at the time of opening the position. When opening a position, the user chooses a currency pair, the type of transaction, ie. whether to execute a Buy or Sell order (purchase or sale) and the amount traded. Such a transaction ends with the conversion of currencies in the opposite direction, ie. by closing the position when the obtained amount of the second currency is converted at the price at the moment of closing the position into the first currency.
The realized difference between the prices of such two prices represents a profit or loss on trading. In addition to the difference in price, the amount of profit (or loss) also depends on the amount traded. On exchanges where shares are traded, profit is realized when some of the shares are bought at a lower price and subsequently sold at a more expensive price, therefore, in order to make a profit, an increase in stock prices is required. On foreign exchange exchanges, profits can be made when prices rise, but also when prices fall. For positions in the direction of Buy, in order to make a profit, the price at the time of closing the position should be higher than the price at the time of opening the position.
For example on the currency pair EURUSD, if the position is open in the direction of Buy at a price of 1.3603, and if the position is closed when the price was 1.3663, in this example the difference in price is positive and in this case the profit is 60 units (Pips) . In the event that such trading is closed at a price lower than 1.3603 such a transaction would end in a loss. With positions in the direction of Sell, the situation is exactly the opposite, in order to make a profit, the price at the time of closing the position should be lower than the price at the time of opening the position.
Currency pair price formation
Exchange rates are formed depending on the expectation that changes will occur in some of the monetary flows, such as: growth of gross domestic product (GDP), inflation, interest rates, budgets, trade deficit or surplus, and other macroeconomic conditions. Supply and demand for a currency occurs under the influence of economic factors, political factors and market psychology:
Economic factors – economic factors can be monitored through economic policy, state structure, central banks and other parameters that are expressed through economic reports. The market usually reacts negatively to an increase in the budget deficit or positively to a reduction in the deficit.
Political factors – domestic, regional and international political conditions and events have a major impact on the currency market. Political instability can have a negative impact on a nation’s economy, and thus on a country’s currency. Events in neighboring countries or regions can have a positive or negative impact on the currencies of other countries.
Market psychology – the perception of investors in the market can affect price movements. Economic reports and estimates affect the movement of currency prices in the market. Parameters such as gross national income (GDP), employment rates, deficit conditions and inflation can directly affect short-term changes in market prices. Investors analyze available data on past price changes to identify patterns they can use to estimate future price movements. Anticipation of upcoming events also affects price changes.
For example, the chart clearly shows that the Japanese yen lost 5-10% of its value against other currencies (EUR, USD, AUD, NZD), this decline in the value of the yen was caused by earthquakes, tsunamis and nuclear disasters that hit Japan March 11, 2011
In early August 2010, Eric Schmidt, one of Google’s executives, stated that approximately five exabytes of data are currently generated every two days (5EB = 5´1018 bytes, or 5EB = 5,000,000,000GB). This is roughly the amount of information that can be compared to the total amount of information that a complete human civilization has created from its beginnings until 2003. A similar situation can be observed in the financial markets, more and more information is available, and such information needs to be processed appropriately in the shortest possible time in order to take advantage of a favorable moment in the market. This situation has led to more and more trading using software methods, which significantly speeds up the trading process.
Automated trading software allows you to monitor a large number of parameters and make real-time decisions. Automated trading software is able to, after noticing a favorable opportunity in the market, independently perform transactions of purchase and sale of a certain currency pair, stock or commodity. The duration of such transactions (from purchase to sale) is often measured in seconds, in some cases such transactions can last only a few milliseconds. In this way, automated trading software gains an advantage over traders who manually issue trading orders.
Trading software platforms
Trading software platforms display changes in market prices and allow users to send trading orders through which they manage their positions in real time. Opening and closing market positions is done by placing a trading order. There are a number of trading software platforms (terminals) that allow users to engage in foreign exchange trading. Such platforms generally have the ability to trade on demo accounts (trading with virtual money) so that users can test their theoretical knowledge and gain the experience needed to trade in order to avoid losses when trading real money.
In order to start trading on the foreign money market, a computer with a trading software platform that can be downloaded for free is enough:
http://www.metatrader4.com
http://www.metatrader5.com
It is also necessary to master the basic rules of trading, to consider the factors that affect price changes, trading risks, to master the basic techniques of analysis and forecasting of market prices, and to get acquainted with the available trading tools. A successful investor is by definition well informed. In order to be able to manage a process, it is first necessary to understand it.