For Beginners: Things You Should Know About Forex

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Abdulmajid

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For Beginners: Things You Should Know About Forex

Abstract:With hundreds of currencies in circulation around the world, the foreign exchange market, the world's largest and most liquid financial market, has a daily trading volume of US$5.3 trillion, 30 times that of the U.S. New York Stock Exchange. What is Forex trading? Simply put, forex trading is about opening a trading position, be it bullish or bearish on the exchange rate between two currencies.

  As opposed to the centralized exchange model used for stocks, Forex is run as a decentralized over-the-counter (OTC) transaction, operating 24 hours a day, five days a week, with four major markets, namely Sydney, Tokyo, London, and New York.

  The currency code usually has three letters, and the exchange rate is a pair of two currencies, such as “EUR/USD” which is the Eurodollar to the U.S. dollar. The former is the base currency and the latter is the counter currency. When the pair is traded, the base currency is used as the standard, e.g. how much USD can be exchanged for one Eurodollar.

  With so many online Forex brokers offering their FX services, the cost of trading is often the primary consideration for retail investors. Investors can determine the cost of trading through spreads.

  What is spread?

  The “pip” in “spread” refers to the unit of currency movement in the foreign exchange market quotes. In order to accurately represent the exchange rate, almost all currency pairs are quoted in five digits. A pip is equal to 0.0001, and a pip is used as a unit for buying and selling.

  As its name implies, the “spread” is the “difference in points”, that is, the difference between the bid price of the buyer and the ask price of the seller.

  Spreads fluctuate with the market and are influenced by factors such as currency liquidity, transaction amount, market direction, and investment strategy, with currency liquidity having the greatest impact. Generally speaking, the higher the currency liquidity, the smaller the spread. From a traders perspective, the lower the spread the better because that is equivalent to a smaller loss and a bigger profit.

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martin88

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Interesting, thank you. Just thinking to get into trading, but not enough knowledge yet.
 
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