The Forex market, or simply FX (short for «Foreign Exchange») is the largest and most liquid financial market in the world, allowing traders to buy one currency in relation to another. When you buy a certain currency, you assume that its price against other currencies will grow and you will be able to sell it back at a higher price. This type of speculation is the basic principle of trading in Forex markets.
Volume and Liquidity
The New York Stock Exchange is the largest stock market in the world. It receives a daily trading volume of $22.4 billion. The FX market can boast $5.3 trillion in daily trading volume. Forex, however, is not only 200 times larger than the world’s largest stock exchange, it is also extremely volatile. Exchange rates fluctuate constantly, creating numerous speculative opportunities. Its high liquidity makes it possible to buy and sell currencies easily.
What is Buying on the FX Market?
The answer to this question is «money», or to be more precise – national currencies of different countries. In the foreign exchange market, all products are organized in pairs. When trading on the Forex market, we buy the currency of one country and at the same time sell the currency of another country.
The most popular currencies in the FX market are the US dollar. (USD), Canadian Dollar (CAD), Euro (EUR), Pound Sterling (GBP), Swiss Franc (CHF), New Zealand Dollar (NZD), Australian Dollar (AUD) and Japanese Yen (JPY). Non-USD currency pairs are called cross currency pairs.
Eight major currency pairs account for 95% of all global trading volume.
The FX market operates continuously on weekdays from 0:00 GMT on Monday to 21:00 GMT on Friday.
A quote is the most recent price in the market that the buyer and seller have agreed upon. It consists of two prices: ‘Ask’, by which an asset is bought, and ‘Bid’, by which it is sold to other traders. The difference between these two prices is known as Spread.
Bid = Sell Price
Ask = Purchase Price
Spread = Difference between ask and bid prices, the commission charged by the boker to carry out the order.
Using the multiplier
Daily fluctuations in currency prices rarely exceed 1%. This means that if you are trading with small volumes of the underlying, the result will be equally humble. One of the possible ways to make Forex trading more economically profitable is to apply a multiplier to your investment amount. The multiplier is a brokerage tool that allows you to receive a potentially greater profit or loss.
Adjusting the multiplier
By using an x25 multiplier, the trader can invest ten times more than the amount of money at his disposal. In this case, any profit you make (or any loss) will be multiplied by 25.
Stop Loss and Take Profit
The major currency pairs fluctuate enough to offer considerable profits to professional traders. However, spending a lot of time passively observing positions and waiting for an opportunity to close them is not at all effective or feasible, at least sometimes. The IQ Option platform offers the opportunity to close positions that have made a profit or are suffering losses automatically when a certain price level is reached.
All you have to do is set the desired profit/loss levels that will trigger the automatic closing of the position.
What makes currencies fluctuate?
Currencies fluctuate according to supply and demand. If the demand for the US dollar increases, and all the others remain unchanged, the price of the USD will soar. The increase in supply will, on the contrary, cause the exchange rate to fall.
What are the main factors affecting supply and demand for different currencies? Possible reasons include, but are not limited to, the monetary policies carried out in exchange by the central banks of their respective countries, inflation and political/economic conditions. Regularly published economic reports, such as unemployment data, changes in GDP and interest rate decisions, have a huge effect on currency pairs. Irregular macroeconomic events, such as Brexit, also have a potential to affect the currency market.
The world’s largest and most liquid market opens up a world of possibilities for individual traders. However, it is important to remember that Forex trading carries a high level of risk and should only be practiced by individuals who are prepared to invest the time and effort necessary to study currency trading.