Forex In A Nutshell
The foreign exchange market is known by many names: forex, foreign currency market, or FX. It is a worldwide marketplace for exchanging currencies from different countries.
This is where brokers — whether individual people like you or collectives like big corporations — buy and sell currency. This is an attractive option for many reasons, the first of which is its global reach. Forex is one of the most liquid asset markets because of its size and the fact that there are so many actors in commerce and finance.
Forex trading is relatively simple and very similar to other financial markets like stocks. This means that forex should come easy if you’ve had prior experience trading. And even if you don’t, then there’s a wealth of available resources both online and offline.
What is forex?
The objective of foreign exchange is as the name suggests: to trade currencies while anticipating fluctuations in price to end up with more than what you paid for. Trading is done by pairing one currency against another, and the exchange rate is the ratio between these two currencies and their values. Ideally, you want to buy currencies that you expect to increase in value and sell currencies that you expect to decrease in value.
The forex market does this in different formats, such as the spot market, which is often the largest forex market. It is where people trade at prices determined by the supply and demand (among other things) between individuals and corporations. There are also the forwards and futures markets where large companies delve into deals that could hedge foreign exchange risks for the future.
People that participate in trading on the forex market do so for a multitude of reasons. The most common ones are to hedge against possible volatility in international currency and interest rate risk, speculation based on global political situations, and diversifying portfolios.
As mentioned above, trading is done in pairs, and reading forex quotes are done the same way. To help with some of the jargon, here are some terms you have to know:
The pairs we mentioned above are specified as the base and quote currencies, often written in three-letter codes (i.e., USD for US Dollar) each and separated with a slash (/), dash (-), or just strung together. The base is the reference element, and the quote represents how much you need to get one unit of the base. This means that if the base quote is 1.75, you will have to pay 1.00 of the base currency to get 1.75 of the base currency. In the market, you often buy the base to sell the quote.
To get more than your initial money’s worth, it’s important to understand concepts such as appreciation and depreciation. To appreciate means to gain value as base currency, and to depreciate means to lose value as base currency, relative to the quote. In the end, your goal is to gain more money. A way to do it is to buy a currency that you believe will appreciate and sell the currency if you anticipate that it will depreciate.
If you are in an open position, this means that you are willing to trade, while if you are “squaring up” or being flat or square, then you have no open positions and you are not selling or buying anything.
Terms like long and short are trader talk for buying and selling, respectively. “Going long” or “taking a long position” means you want to buy the base currency and sell the quote currency while “going short” or “taking a short position” means you want to sell the base currency. Ideally, you go long when you’re rooting for the base currency to appreciate so you can sell it for more, and you go short when you want the base to depreciate so you can repurchase it at a lower price.
Once you get into trading, you’ll find that forex is quoted in two prices: the bid, oftentimes the lower price, and the ask. The bid is the price that your broker is willing to buy the base currency from you. It’s the highest possible market price you can sell it for in the market. And if you’re selling, the broker buys it from you at the bid price. The ask, also known as the offer price, is your broker’s price for being willing to sell the base. It is the best deal you can get, meaning it’s the lowest possible price you can buy it for on the market. If you’re buying, you can buy the base currency from your broker at the asking price. Moreover, the spread is simply the difference between the two.
The forex market is one of the best-established marketplaces, and if you want to try it yourself, there are many resources online to choose from and much more traders willing to share their experiences to beginner traders like you. Another way is to create a demo account where you can practice trading in the live market without the commitment of putting in real money yet.