What is Forex?

1. Round-the-Clock Trading

One of the more distinctive features of the forex market is that it never sleeps. The major trading hubs are spread throughout the many different time ones, which removes the need for traders to wait for an opening or closing bell. As the U.S. trading market closes, the Eastern markets are opening, which means you will be able to trade 24 hours a day with the exception of the weekend. Likewise, you will be able to trade forex on the Fort MT4 platform continuously throughout the business week, making it an attractive option for those with busy schedules or day jobs.

2. Global Exposure

With the world becoming more and more interconnected and globalized, the successful trader is constantly on the lookout for more investment opportunities. The great thing about trading in forex is that you will be able to make investments in another country’s currency and increase your footprint in the market relatively easily, as you will not need to worry about foreign security laws and financial statements in a language you cannot understand. You will not even need to travel to a different country to trade on their currency—you can access their markets anywhere you are in the world.

3. Ability to Go Long or Short

There are no limitations to buying and selling currencies when it comes to forex trading unlike trading in other markets, where it can be difficult to sell short. If you think a currency will trend upwards, you can opt to purchase it. If you think it will trend downwards, you can opt to sell it at any given time. This means that when it comes to forex trading, whether it is a bear market or a bull market—you will have to opportunity for profit regardless of what goes around in the market.

4. High Liquidity

Forex is a market wit a daily trade volume of roughly $5.1 trillion. A great proportion of trades take place with only a few major currencies. Under normal market conditions, there will be a near constant supply and demand in the forex market This means that at any point in time, there will always be someone trading in the market. It is thus typically very easy to get in and out of trades quickly, even when working with relatively larges sizes of trades.

5. Leverage

Fort traders are able to trade currencies with leverage of 1:100. This is due to the deep liquidity of the forex market. This allows you to trade on even the most minimal moves in the market and thus take advantage of it.

6. Low Barrier to Entry

Forex, which has traditionally only been available to institutional investors or very wealthy individuals, is now available for all. The trading costs of the forex market are comparatively lower than other financial markets, making forex trading one of the most cost-effective trading vehicles available to retail traders today. Fort’s accounts are made up of tight, competitive prices, allowing you to situate yourself favorably within the forex market and maximize your profit potential.

7. No Market Cornering

The forex market is by far the largest and most liquid of all financial markets. This is great advantage for traders as the immense daily traded volume of currencies means no single person or institution, not even the Central Banks, are able to control or corner the market. As a Fort trader, you will always be in a position to buy or sell a currency at a reasonable price with ease through our MT4 trading platform.

Gaining an understanding of why forex is so large a market as it is today will help us make better decisions as traders. The entire trading experience can be thought of as the building of a great fortress, where each piece of stone represents a single aspect of the market. It is only when all these different pieces are put together in a cohesive way, will we have a strong structure that will withstand the elements. In other words, knowing the ins and outs of the forex market will allow us to then understanding why successful traders are successful, and allow us to understand how to achieve that same success. In our next section, Core Elements of Forex, we will take an in-depth look at some of the pieces which make up our great fortress of the trading experience.

Once we understand what Forex is and why it is occupies so large a portion of the global financial markets, we can begin to delve into the core elements that make up forex trading: exchange rate, currency pairs, appreciation/depreciation, margin, leverage and swap. Understanding these few concepts will allow you to better grasp how Forex works and, subsequently, how you can best utilize Fort’s industry-leading MT4 trading platform to navigate your way around Forex trading.

Every time we make a trip overseas, we are making a forex transaction. When we travel into Europe, we have to convert our local currency into Euros. In this process, the exchange rate between your currency (the US Dollar, for example), determines how many Euros you receive for every Dollar. This rate of exchange is based on the supply and demand of both the Euro and the US Dollar, and it is constantly fluctuating. A favorable exchange rate will allow you, as a traveler and thus a buyer, to gain better value for your money.

Why do exchange rates between currencies fluctuation constantly? Understanding this is key as a trader, for it will aid you in your decisions and trades in the forex market. Currencies are traded in an open market, the foreign exchange market being a global decentralized market that determines the relative values of different currencies. A currency’s value changes as its demand and supply fluctuates. The relationship between supply and demand and its impact on exchange rate is as follows: An increase in demand or a decrease in supply for a currency will cause the value of a given currency to rise. Conversely, a decrease in demand or increase in supply for a currency will cause the value of a given currency to fall.

This is the basis of Forex trading. As a trader, you will be able to capitalize on these exchange rate fluctuations and reap a profit if you are able to predict how the exchange rate between a currency pair will change over time. The following point will demonstrate exactly how currency pairs work.

By definition, a currency pair is a pricing structure and quotation of all the currencies traded in the forex market. An example of a currency pair would be the US Dollar and the Euro, represented as USD/EUR. As we already know from understanding exchange rates, the value of a currency is determined by its comparison with another currency. The first listed currency of a currency pair, in our example, the US Dollar in USD/EUR, is called the base currency. The second listen currency, the Euro in USD/EUR, is called the quote currency. The currency pair tells you how much of the quote currency is needed to purchase a single unit of the base currency.

The currency pair can be referred to as a single unit, even if forex trading involves the simultaneous purchasing of one currency and the selling of another. Whenever you purchase a currency pair, you are buying the base currency and selling the quote currency. The buying price tells you how much of the quote currency you need to attain a single unit of the base currency. In contrast, when you sell a currency pair, you are selling the base currency and attaining the quote currency. The asking price for the currency pair tells you how much of quote currency you will get for selling the base currency.

Major Currency Pairs

In the forex market, there are an equal number of available currencies and currency pairs. As currencies are introduced and removed from the market, currency pairs do the same. All currency pairs can be categorized in correspondence to the total volume of it that is traded on a day-to-day basis. The following currencies are traded in the highest volumes against the US Dollar and can be regarded as major currencies: the Euro (EUR), British Pound (GBP), Japanese Yen (JPY), Swiss Franc (CHF), Australian Dollar (AUD) and Canadian Dollar (CAD). These currencies have very narrow spreads, highly liquid markets, and are traded every business day, 24 hours a day.

Minors and Exotics

Minor currency pairs, or crosses, are currency pairs that are not coupled with the US Dollar. These pairs are not nearly as liquid as the majors and have wider spreads, but they nevertheless are regarded as liquid markets. The currency pairs that are traded in higher volumes contain a major currency as part of the cross, some of which are: EUR/CHF, GBP/JPY and EUR/GBP.

Exotic currency pairs refer to currencies of emerging markets. They are not as liquid as the majors and minors, and their spreads are considerably wider. The following are some examples of exotic currency pairs: USD/HKD (Hong Kong Dollar), USD/SGD (Singapore Dollar), USD/ZAR (South African Rand) and USD/DKK (Danish Krone).

When it comes to forex trading, the term currency appreciation refers to an increase in value of one currency in comparison to another. In other words, it is when a currency is worth more in terms of a foreign currency. Conversely, the term currency depreciation refers to a decrease in value of one currency in comparison to another, which means a currency is worth less in terms of a foreign currency. There are a great number of variables which determine a currency’s appreciation or depreciation, including interest rates, business cycles, trade balances and government policy. We know now that currencies are quoted and traded in pairs. This is unique to forex. When it comes to stocks, the listed price represents its value, whereas a currency quote represents the exchange rate of a currency pair.

When we look at a typical currency quote, we will notice that it lists the currency pair as a fraction. For example, USD/JPY=103.648. The base currency, the US Dollar in this case, represents a single unit. The quoted currency, the Japanese Yen in this case, represents the amount of currency needed to equal one unit of the base currency. In this example, a single unit of the US dollar allows you to buy 103.648 units of the Japanese Yen. An appreciation of the US Dollar occurs when a single unit of the US Dollar is able to purchase more than the current number of units of Japanese Yen. In simple terms, an increase of an exchange rate results in an appreciation of the base currency, with the inverse being applicable to the quoted currency.

When it comes to forex trading, margin can be understood as a deposit that is required when using leverage. As a trader, each time you open a leveraged position, a fixed amount of your account balance is secured as margin. The precise amount that is secured is dependent on the size of the position and the leverage which is being used. Your available margin refers to the amount you have in your trading account which is not presently being used to guarantee any positions, and this amount can be used to guarantee the opening of subsequent trades. Also related to the margin of your trades, is your equity. Your equity refers to the amount in your trading account including to excluding the gains or losses from any open positions you currently have.

How then is your margin level calculated? This is dependent on the ratio of your equity to used margin, and is represented as a percentage. When the figure dips to 100%, it means your entire trading account balance is being used as margin, and that no future positions may be opened. It is important to keep your margin level as high above the 100% mark as possible—this is even doubly important for traders who invest over longer durations of time. Should you have a relatively high margin level, you will not have to worry about a trade momentarily turning against you as you have more than adequate funds in your trading account balance to make it through the period of difficulty. This means that when you are confident in the positon you have taken and think that the market’s move against it will change for the better in time, you will have the means to wait for the trend to reverse.

Leverage, in the forex market, enables you to command positions that go over the value of your capital. At any point in time, when you borrow money or use a financial instrument to make an investment that exceeds the value of your initial investment, you are using leverage. When it comes to trading, leverage is expressed as a ratio, and Fort offers our traders leverage of up to 1:100, which translates to 100 times the amount invested. To put it in context, should you wish to purchase a single lot of US Dollars (USD100,000) and have your account leveraged 1:100, then you will have to spend 1,000 US Dollars (or the equivalent of the currency your account is denominated in) as margin to guarantee the position.

Traders in the forex market may also use leverage to profit from the fluctuations in the exchange rates between the currencies of two different countries. The leverage that is attainable in the forex market is one of the highest a trader can achieve. Typically, transactions in the forex market are carried out in large amounts. This is due to the minimal movements of prices of currency pairs, which are more often than not mere fractions of a cent. When you execute trades with high leverage, these minute price movements can translate into sizable profits when magnified through large leverage ratios.

In forex trading, swap is also referred to as a rollover, and it denotes the interest paid for holding a position overnight. If the interest rate on the currency you bought is higher than the interest rate of the currency you sold, then you will earn rollover, or swap. The inverse applies when the interest rate of the currency you bought is lower than the the interest rate of the currency you sold.

When it comes to swap charges, they are dependent on the interest rates of the respective countries in a currency pair. They are also dependent on whether the positon is short or long. In any given currency pair, the interest is received on the currency bought and paid on the currency sold. Each world currency has an interest rate connected to it.

As we can see, the forex market consists of a number of elements and variables that affect the movement of currency prices. As a trader, learning to understand the basic ideas and concepts of the forex market will make it easier for you to make the best decisions that will play a major role in your success. It is akin to familiarizing yourself with the vocabulary of a new language, and once you do, you will be able to navigate it with is. Fort believes in aiding all our traders with the learning of this new trading language, and that is why we provide a vast range of resources for you. In addition to forex, Fort traders will benefit immensely from understanding the workings of FX Derivatives trading, as it plays a fundamental role in forex trading and is a great tool you can use to maximize your profits.