How Does Forex Work

Forex refers to the foreign exchange market where various currencies are traded.

One of the interesting features about forex market is that it is decentralized that is there is no central marketplace and the currencies are traded electronically over the counter.

  • The currencies are traded 24 hours a day 5 days a week these are traded at the major financial centers of New York, Tokyo, London, and others and are extremely active at any given time of the day.
  • Currencies are always traded in pairs. The first currency listed in a forex pair is called the base currency, and the second currency is called the quote currency.
  • The price of a forex pair is how much one unit of the base currency is worth in the quote currency.

Basic Terminology


Spread
It is the difference between the sell quote and buy quote, it basically represents the brokerage service cost. The bid price is always lower than the ask price and thus the difference between ask and bid price gives spread.
Exchange rate
It refers to the value of one currency expressed in terms of other for eg. If EUR/USD is 1.32 then it means that 1 euro is worth US$1.32.



PIP
Also called point or points it represents the smallest increment of price moment that a currency can make. Most of the currencies trade within a range of 100-150 pips. It is different for different currencies for example for Euro, US Dollar, British pound or Swiss franc one pip is .
Bid and Ask price
Bid price refers to the price at which the market will buy a particular currency from you. It generally represents a price at which a trader can sell a base currency to the broker. Ask price represent just the opposite that is the price at which you can buy the base currency from your broker.


Leverage

  • The forex markets offer large leverages and it allows the trader to gear the account into a position greater than the total account margin for instance if a trader has $2000 of margin in his or her account and he or she opens a $200000 position with $2000, a leverage of 100 times has been used.
  • The leverages are generally mentioned in ratios such as 10:1,15:1 and so on.


Margin

  • It refers to the deposit that needs to be maintained to open or maintain a position. Basically, there are two types of margins that are used and free margin, the used margin is the amount which is used to maintain an open position and the free margin refers to the amount which can be used to open new positions.
  • In order to maintain an open position, the minimum amount needs to be maintained.

Forex Analysis

There are several ways of interpreting and analyzing the forex market. Though there are many categories, keep in mind to identify the one that best fits a good trading opportunity.

We will look at three main areas of analysis and how to learn more about them. Then try out which analysis works well for you. The three main areas of analysis are

  • Fundamental
  • Technical
  • Sentimental

Technical Analysis

It refers to the deposit that needs to be maintained to open or maintain a position.
Basically, there are two types of margins that are used and free margin, the used margin is the amount which is used to maintain an open position and the free margin refers to the amount which can be used to open new positions.

In order to maintain an open position, the minimum amount needs to be maintained.


Fundamental Analysis

Forex fundamental focuses mostly on the currency’s interest rate. Other fundamental factors are Gross Domestic Product, inflation, manufacturing, economic growth activity.

However, whether those fundamental releases are good or bad is of less importance than how those releases affect that country’s interest rate.


Sentimental Analysis

Forex sentiment is another popular form of analysis. When you see sentiment overwhelmingly positioned to one direction that means the vast majority of traders are already committed to that position.



Order Types

Market Order
A market order is an order that is placed ‘at the market’ and it’s executed instantly at the best available price.
Stop Entry Order
A stop-entry order is placed to buy above the current market price or sell below it.

Limit Entry Order
A limit entry order is placed to either buy below the current market price or sell above the current market price .
Stop Loss Order
A stop-loss order is an order that is connected to trade for the purpose of preventing further losses if the price moves beyond a level that you specify.

Take Profit Order
An order used by currency traders specifying the exact rate or number of pips from the current price point where to close out their current position for a profit. The rate deemed to be the level where the trader wants to take a profit is sometimes referred to as the “take-profit point”.