What Is FOREX? Unknown Facts & Figures (The Ultimate Guide)

What Is FOREX? Unknown Facts & Figures (The Ultimate Guide)

Forex is the largest financial market in the world.

That’s why you might want to hop on the train as I do.

Let me help you to enter the forex market and start trading.

Read this entire guide about earning money with Forex.

Ted Capwell

Content

I’m gonna start by explaining the forex market in less than 1,000 words.

No fluff, only real experience.

If you travel to another country, you need to buy that country’s currency and sell your own.

There’s a difference between rates of currencies.

So, you do an exchange.

This is what Forex is all about.

Exchange this is what Forex is all about

Forex or foreign exchange is a marketplace where you can buy and sell currencies.

The market comprises pairs of currencies like EUR/USD and GBP/USD.

They represent the ISO code of the country.

You buy or sell a pair based on one currency’s strength.

For instance, if you think USD is weaker and EUR is stronger, you will buy EUR/USD.

The currency on the left side is a base currency.

Conversely, the currency on the right side is the quote currency.

In Forex, when you buy the pair, the exchange rate tells you how much you have to buy and sell currency units.

When you buy, it is the base currency.

On the flip side, when you sell, it is the quote currency.

For example, in EUR/USD, EUR is the base currency, and USD is the quote currency.

The price on the left side is the bid price, and the right is the ask price.

The bid price reflects how much you need to sell currency.

The ask price represents how much you require to buy currency.

Suppose GBP/USD shows up as 1.4000/1.4060 on the trading platform.

Then 1.4000 is the bid price, and 1.4060 is the ask price.

Now, when talking about bid/ask prices, there’s a term called the spread.

The spread is the difference between the bid and ask price.

When you get a price on the platform for a pair, you’ll notice a small figure at the bottom.

It’ll show up as 0.6 or 1.2.

This is spread.

Suppose you buy GBP/USD at 1.4060.

Then you won’t buy exactly at 1.4060, but at 1.4066 or any other rate.

Your forex broker sets this price difference, and this is how they make money.

How do we get pair prices?

How do we get pair prices?

You probably are thinking, “Why is there a decimal point, and how the hell did I come up with this figure”?

Let me explain.

The only exception to this rule is the pairs of JPY (Japanese Yen).

Forex takes up to four or five decimal points like 1.4000 or 1.40000.

They show up as two or three decimal points, like 112.50.

The smallest decimal point is the pip value.

The pip is the smallest point for the currency pair and equals 1/100 or 1%.

Suppose the price of EUR/USD moves from 1.1950 to 1.1960.

Then the pair moves ten pips.

In Forex, you have various lot sizes that help you trade.

There are three types of lot sizes; micro, mini, and standard.

A micro lot is 1000 units of a currency and equals $0.10.

A mini lot is 10,000 units of a currency and equals $1

A standard lot is 100,000 units of currency and equals $10.

The trading process

The trading process

So, how does the actual trading process work?

Is it complex?

Well, let’s find out.

One thing I should mention is terms long and short.

Pips and lot sizes are how you actually place the trade.

Going long means you are buying the pair, and you are selling the pair by going short.

Fluctuations in exchange rates

Let say you buy EUR/USD with a standard lot size.

Each pip in your favor will equal your profits to $10.

So, if you make like 20 pips, your profit is $200, i.e., 20 x 10 = 200.

Ok, let’s turn to a micro lot.

If you have favored pip movement of 20 pips, then your profit is 0.10 x 20 = $2.

You see size matters in Forex.

As we are in the trading process, I’m gonna divert your attention to leverage.

Often described as a double-edged sword, leverage is how you actually take positions.

Leverage is a ratio that gives you more purchasing power.

It signifies 1:10 or 1:100.

Your chosen forex broker gets to decide how much leverage you’re going to get.

For example, you got leverage of 1:100 on a $1000 account

You can open a position of $100,000.

You see why this is a double-edged sword; it can magnify your profits and losses.

How does the market work?

How does the market work?

Now that you know what Forex is let’s move to how the market works?

I’ll break down the whole process.

And I’ll tell you how the market never sleeps.

Unlike the stock market, the forex market has no central marketplace.

All the trading happens electronically over the counter, aka OTC.

Traders and financial institutions from around the world place their trades electronically.

The forex market runs round the clock 24/5, allowing you to trade whenever you want.

There are four forex trading sessions, Sydney, Tokyo, London, and New York.

The market wakes up in Sydney at 11 PM GMT and then sleeps at 8 PM in New York.

When the trading day in New York ends, Tokyo and Sydney’s session starts.

That’s why I love the forex market because it doesn’t bother me with specific hours.

I can trade which pair I want to round the clock.

There you go, we have finished what Forex is.

I want to make one thing clear that there’s more to forex trading than this.

But I wanted to explain to you the basics in less than 1k words.

So, you can get an idea of what forex trading is.

How can you make money in Forex?

How can you make money in Forex?

Let’s move to how you can make some cool pips with forex trading.

Remember, this isn’t a get-rich-quick scheme.

So, I’ll tell you how to make money the right way.

By analyzing the market, I mean by doing technical and fundamental analysis.

Making money is all about analyzing the market and taking your positions at the right time.

Analyzing the market

Technical analysis tells you the pair’s movement by depicting on the charts.

Within technical analysis, we have technical indicators that show where the price is heading.

Fundamental analysis is all about external factors.

They can be economic, political, and even natural disasters and their impact on the pair.

You combine both technical and fundamental analysis to make money in Forex.

However, let’s be realistic for a moment.

You are not gonna make gazillions in the first few days or months.

What you need to do is learn the art, practice, test your strategies.

Keep the emotions out of your trading.

Forex facts and figures

Forex facts and figures

I don’t know about you, but I’m a bit of a data nerd.

I like to collect info about the forex market trends, facts, and figures.

So, here I’ll dig deeper into forex industry stats and facts.

Daily Turnover

As I’ve told you earlier, the forex market is the largest financial market, bigger than stock, commodity and bond markets.

The forex market is 35 times larger than the stock market.

Imagine a baby and a giant.

That’s how big the forex market is compared to the stock market.

The daily turnover of the forex market rose from $1.2 trillion in 2001 to $6.6 trillion in 2019.

The market is currently worth $2.4 quadrillion.

Forex is the only financial market open 24 hours a day, five days a week.

Major players of the forex market

With this big market, you don’t think two guys are sitting in the basement controlling the forex market.

The market involves various players and has a hierarchy.

It starts with financial institutions like central banks, commercial banks, hedge funds, and investment managers.

Then we have retail traders like you and me.

Big players move the market due to their massive volume.

Me, you, and other traders make about 5.5% of the entire forex market.

Still, we can make some cool pips, right 😎

Forex currencies

Do you know over 170 foreign currencies are traded on the forex market?

The US dollar is the most widely traded currency in the world.

It accounts for around 73 % of all worldwide trades.

The EUR comes next, accounting for around 39.7% of global trade.

The third most traded currency is the Japanese Yen (JPY)

It contributes 25.7 % of all trades.

With 20.7 % of worldwide trading, the British Pound (GBP) is the fourth most traded currency.

The Australian Dollar (AUD), followed by the Canadian Dollar (CAD), Swiss Francs (CHF), and New Zealand Dollar (NZD), is ranked fifth (NZD).

Fun fact: The Swiss franc is often regarded as the most stable and safe-haven currency.

Forex pairs

As I mentioned above, Forex is traded in pairs.

Seven currency pairs account for more than 70% of all forex market transactions.

They are known as major pairs.

They include EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CAD, NZD/USD, and USD/CHF.

EUR/USD is the most traded pair in Forex.

Those pairs that don’t include USD are minor forex pairs.

Examples of forex minors include EUR/JPY, GBP/JPY, EUR/GBP, CHF/JPY, EUR/AUD, NZD/JPY, and GBP/CAD.

The third type is exotic pairs.

They comprise a major currency with currencies of developing nations.

Examples include USD/HKD, USD/SEK.

Demographics

So, how does the forex market stand with demographics?

Men account for the vast majority of forex traders, with women representing only about 12%.

Women are better traders than males, according to research conducted by Warwick Business School.

By taking fewer risks and creating long-term strategies, they outperform their male counterparts.

When it comes to age ranges, 43.5 % of traders are between 34 and 45.

Millennials, often known as Generation Y, account for around 5% of all forex traders.

Retail forex traders over the age of 45 account for 15% of all traders.

Final thoughts

Final thoughts

Forex trading isn’t a complex equation.

It’s all about learning and honing in on your strategies.

By keeping track of the market stats, you can get more involved in the industry.

Then you’ll eventually become a pro trader.