Forex is an abbreviation of foreign exchange. It is buying and selling of currencies. For this trade to be conducted, currencies must be used. Through forex, you can get all the currencies that you might need.
The forex industry is a large market globally, primarily because of the huge need to exchange currencies with businesses and individuals. A unique aspect about the trade is that there is no central market where the buyers and sellers meet. Rather, it is conducted over-the-counter electronically through computer networks between the traders worldwide.
Notably, the market operates 24 hours a day for five and a half days a week. Demand for a certain currency will either push down or up the value of the currency to others. With this in mind, there are some basic things you need to know about the currency market.
- a) Currencies Trade in Twos
In the Foreign exchange currency market, currencies trade in pairs. For example, if you exchange euros for dollars, the two currencies are involved. This means that you must exchange one currency for another.
Currency pairs are used in the market hence the reason why you always see the cost of a currency to another. The USD/EUR price, for instance, shows how many euros (EUR) are used to buy one US dollars.
- b) The Market Uses Symbols to Represent Currencies
Every currency traded in the market uses symbols. For example, the Australian dollar is symbolized by AUD, Swiss franc by CHF, Canadian dollar by CAD and US dollar by USD among others.
- c) Every Forex Pair has a Market Price
Every forex pair has an associated market price. The market price shows the amount that the second currency can be spent to buy a unit of the currency that comes first. For example, if the market price of AUD/USD is 1.5000, it means that 1.5000 US dollars will be spent to buy a unit of Australian dollars.
To find out how many Australian dollars will buy a unit of US dollars, change the pair to USD/AUD. The rate will then be calculated by dividing 1 by 1.5 giving 0.6667. This means that it costs 0.6667 Australian dollars to buy a unit of US dollars. It is necessary to note that the prices fluctuate constantly.
- d) Most Pairs Move from between 50 Pips to 100 Pips
A pip is considered to be the fourth decimal in a pair. If the price of AUD/USD moves from 1.5000 to 1.5075, the pip price has moved to 75 pip. Equally, if you buy the pair at 1.5000 and sell it at 1.5075, it means that you have made a profit of 75 pip.
- e) First Currency in the Pair is the Directional Currency
For trade use, the fluctuation in the price is determined by the first currency. If in the chart the market price of AUD/USD is moving higher, it means that AUD is moving higher in relation to USD. Equally, if the market price is falling, it means that the value of AUD is declining in relation to the USD.
A clear understanding of the concepts mentioned above will help you in grasping what happens in the foreign exchange market. If you want to start investing in the market, consult the TradeBNP brokers. They will give you an opportunity to trade in the main currencies as you learn more about the market.