What is Forex?

What is Forex? - InvestGrowRepeat.com

The Foreign Exchange market, or Forex (FX) for short, is the largest financial market in the world with trillions of the world's currencies being exchanged every day.

It is made up primarily of the world's central banks and other large financial institutions, which facilitate the exchange of one currency for another.

Unlike many other financial markets, the forex market is decentralized, which means there is no oversight or governing body. The market participants (central banks) in the forex market self-regulate, which has been historically very successful.

Related: Stocks vs Forex: Why Trade Forex?

Making Money in Forex

Many people become interested in the forex market as a way to make money from the regular changes in value of one currency compared to another.

Learn How to Win in Forex

Technically, if you have ever made a trip to another country, then you have participated in the foreign exchange market when you exchanged your home currency for the foreign currency. These exchange rates are determined by market supply and demand, and they are always flucturating.

For example, imagine that you make a trip to Europe for only one day. As soon as you get there, you exchange your US Dollars for Euros. You then spend all day sightseeing and end up not spending any of your money. During the day, the Euro significantly increases in value against the US Dollar, and when leaving you discover that your Euros have been converted into a lot more US Dollars than what you started with.

You have made money as a forex trader.

In reality, forex traders participate in the forex market electronically, so no actual currency is physically exchanged. However, the potential gains or losses in the forex market are very real, and many hope to make a fortune from trading foreign currencies.

All currencies in the forex market are traded in "pairs," such as the EUR/USD, USD/CAD, or EUR/AUD. If a person buys the currency pair, such as the EUR/USD, then they are simultaneously buying Euros and selling US Dollars. If the Euro increases in value against the US Dollar, then when the person closes the trade by buying back US Dollars (and selling their Euros) they will have gained the positive difference in value as profit.

Forex Price Movements: Pips and Pipettes

The actual price movements in the forex market are typically pretty small, with one cent being a fairly large change in value.

However, through the use of leverage, a forex trader can make a lot of money from the movement of only one penny.

The smallest units of measurement in the forex market are pips and pipettes. A pip is one hundredth of a cent, which means 100 pips is equal to one cent.

If a person trades with 50,000 units (which is feasible with only about $1,000 of margin, assuming 50x leverage), then each pip would be worth $5 and a gain of 100 pips is worth $500.

As you can see, making money in the forex market has greater possibilities than any other financial markets, largely due to the ability to use high leverage. Granted, leverage is a double-edged sword that both accelerates your gains but also can escalate your losses – so it should be used carefully.

A pipette is simply one tenth of a pip, which allows for the use of partial pips. It is not uncommon to see spreads like 1.5 pips (or 1 pip and 5 pipettes).

Forex Traders and the Forex Market

Many forex traders think they are trading in the actual forex market, but this is slightly incorrect.

As an individual, it is impossible for you to directly participate in the forex market. Even in the example above of you visiting Europe, you are not trading directly with the forex market, but rather with a market-maker.

Instead, the major market participants are banks and large financial institutions. Therefore, when a forex trader makes a trade, they are actually trading with their forex broker, who is then trading with one of these financial institutions.

This fact is important to understand, because it means that the reputation of the broker matters since they are the ones taking the other side of your trades.

Learn How to Win in Forex

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