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What is Forex? Learn How Forex works?

What is Forex?

Learning how Forex works is important for any FX trader, especially for those who discover Forex trading.

A beginner trader tends to take his first steps on Forex. Thus, it is essential to know the definition of Forex and how it works.

Forex definition

Forex is an OTC market where investors or speculators will buy and sell currency pairs. Forex, or FX, is the contraction of Foreign Exchange.

In finance, Forex is the foreign exchange market, where the currency of one country, called a currency, is exchanged for another currency at a constantly changing exchange rate. Forex allows you to speculate up or down one currency against another currency.

How to get started on Forex?

Discover the 10 steps to get started on Forex:

  • Find the broker that suits you or get a forex broker license.
  • Practice on a demo account and train with this broker.
  • Choose a Forex trading strategy on which you feel comfortable.
  • Open a real account with this broker and deposit funds.
  • Install the online Forex trading platform.
  • Find the currency pair you have selected for your strategy.
  • Place your order.
  • Set your Stop Loss and Take Profit.
  • Close your order.
  • Continue to train tirelessly.

Trading on Forex is not a game. Trading involves a number of risks, including that of loss of money. Trade money that you do not need either to meet your daily expenses or to finance a short-term project. Be reasonable and do not take unnecessary risks during your trades.

How does Forex work?

To learn how to trade, it is very important to start by knowing how Forex works and knowing the basic vocabulary.

Currencies

There are two types of currencies:

  • Fixed currencies: they are controlled by states, such as the US dollar controlled by the United States.
  • Floating currencies whose price varies according to supply and demand.

Among floating currencies, there are three types of currencies:

  1. Major currency pairs.
  2. Minor currency pairs.
  3. Exotic currency pairs.

The pairs of the world’s most popular currencies are the US dollar, the euro, the pound sterling, the Japanese yen and the Swiss franc.

These currencies are part of a group of so-called major currency pairs: EURUSD, GBPUSD, USDJPY and USDCHF.

There are three other currencies that are common in Forex operations: the New Zealand dollar, the Canadian dollar and the Australian dollar.

If they are associated with the US dollar, we get a group of small currencies: NZDUSD, USDCAD and AUDUSD.

All other currency pairs present in Forex trading are generally called “exotic currency pairs” and account for less than 10% of all foreign exchange transactions:

  • GBPJPY
  • CADJPY
  • EURNZD
  • EURGBP
  • Etc.

Quotation

In Forex, one currency is quoted in pairs, that is, it will always be compared to another currency.

For example, the value of the euro (symbol: EUR) will be expressed against another currency, such as the US dollar (symbol: USD), which will form the euro dollar pair, noted EUR/USD.

When you read the name of a currency pair, you must look carefully at the left and right symbols.

On the left, it is the basic currency, the one that the Forex trader buys and sells. On the right, it is the quotation or counterparty currency.

Currency exists alone, not as a couple. Traders simply speculate on future price movements, without buying currencies.

The logic of Forex trading is simple to understand with the help of a fintech lawyer. A trader buys a currency pair in the hope that his listing will increase. The trader sells the currency pair when he thinks that the currency pair will fall.

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