What is Forex – Ultimate Guide
“Disclosure: Some of the links in this post are “affiliate links.” This means if you click on the link and purchase the item, I will receive an affiliate commission. This does not cost you anything extra on the usual cost of the product, and may sometimes cost less as I have some affiliate discounts in place I can offer you”
What is Forex is common question so let me answer that for you.
Forex for retail traders, and that is you and me, is a place where you make money by predicting where the price of a currency pair will move. If you predict correct way you make money and if you predict wrong you lose money.
This tutorial is written for anyone who wants to know what is Forex. Learning takes time because the Forex is a large place with many unknown terms to common people.
If you are a beginner this tutorial about what is Forex will help you understand what Forex is, its definition and what you can do on the Forex.
I will show you what is Forex in basic terms and later on how you move forward I will show you more complex terms that professionals use in their trading analysis.
If you do not know anything about Forex you will learn step by step all that is needed to know.
If you know something about Forex, this tutorial will enrich your current knowledge with new knowledge through examples I will show you. Those examples are based on the real situation on the Forex so you can be sure that you will encounter the same situation and you will be ready for it.
What you need to have when you start reading this tutorial is time and willpower. Those two things are only necessary to comprehend this interesting area in financial markets.
What is Forex
While you are here you want to know what is Forex in simple terms as possible. There are a lot of articles about Forex where authors describe Forex as a place where exchange of currencies is held.
Even that is true, for beginners in the Forex who want to know more about making money that information is not so important.
That is why I will skip writing in depth about Foreign Exchange Market aka Forex but I will focus more on simple terms needed for Forex trading.
But before moving forward on the terms you want to know I need to cover some area about Forex so you understand what Forex means.
As I said earlier Forex aka Foreign Exchange Market, is a place where many companies, banks and people are exchanging their money. That means they are exchanging one currency for another.
You know that you need to bring money with you if you are traveling to France. If you are from the U.S. then you need to have Euro currency to pay expenses while traveling through France.
To make that happen you need to go into exchange and make conversion from U.S. dollars into Euro.
In order to explain to you what Forex is and what does Forex means I have made one article that will reveal all that you need to know.
The article “what does Forex means” explains what Forex is, how did the Forex word become word for Foreign Exchange Market and what is Forex meaning in English.
As explained, Forex is a place where currencies are exchanged. While money is exchanged between many participants and I am talking about the largest sum of money you could think of, the Forex is also called the Forex industry.
Industry is a branch where many companies find their interest to make money. Are those banks or private funds or common people like you and me, it is the industry where the money is made.
Because it is so large all those participants are regulated in some way with laws in each country where the money is exchanged.
For more details I have made an article about Forex industry that will show you what is:
- Forex Industry
- what are Forex industry rules
- what are Forex industry trends
- Forex industry services
- size of the Forex industry
- worth of Forex industry
- Forex industry news and
- Forex industry Scams
Now it is time to start reading more about Forex where you can find your place and make money.
First lets take a look who are the participants so you can easily follow next part of the article.
- Major banks
- Electronic Brokering Services(EBS)
- Medium size and small banks
- Retail market makers
- Retail ECNs
- Hedge funds and commercial companies
- Retail traders
On the upper side of the Forex you see large banks who holds most currencies.
On the next level we have hedge funds, retail market makers and retails ECNs who make transactions through commercial banks.
Because all mentioned participants are on the second level they have worse rates compared to top level banks. If you want to have best rates you see where you should be, on the top level.
On the bottom are we, small retail traders who trade over retail market makers, also known as Forex broker. While we are at the end we pay higher rates when trading currencies on the Forex but those rates are acceptable.
Many brokers are fighting for customers and everyone is looking to lower the rates in order to attract new traders.
Forex as any market allows sellers or buyers to make a purchase. Through that purchase you can buy or sell something.
Will you make money by selling or buying, it is up to you.
While common market where you buy groceries is a place where you usually spend money, Forex is the a place where you can make money. And, of course, lose money if you make wrong decisions.
How do you make money and how do you enter into the Forex is easy thing to do. Maybe you are not familiar with steps needed to enter into the Forex but now you will learn a little more about Forex.
You need to understand how the Forex functions and who are the participants on the Forex market.
Read more: All About Forex Market
Forex Currency Exchange
When you decide to exchange one currency for another currency you go to the exchange office. That office is small retail exchange office that cooperates with banks.
Banks are major exchange offices where you go to make exchange between currencies. They have many different currencies in their reserves so it is not a problem to find very exotic currency to exchange with.
If you decide to exchange your currency for any other currency you will need to sell your currency and to buy desired currency.
At which rate you will make exchange is the rate that is currently listed in the exchange office. While each exchange office have different rates you will search the best rates you can find. You should find the one that gives you the best ratio so you do not lose money while converting currencies.
If you need help with understanding how currency exchange works and how to read exchange rates listed in the exchange office I suggest you visit next article where is explained Forex currency exchange.
What are Forex Currency Pairs
If you exchange your currency in the exchange office you have your domestic currency which you will use to pay for when buying new currency.
In the exchange office you have seen currencies listed with exchange rates at which you can buy or sell certain currency.
In Forex, where you as a trader buy or sell currency, you have currency pair which consists of two currencies. That currency pair is called Forex currency pair or trading pair.
Everything in Forex is about pairs. In order to understand why Forex is all about Forex currency pairs you need to know which Forex currency pairs exist and how they are segmented.
There are Forex currency pairs that are traded more than some less known currencies. Here you can take U.S. dollar and Euro as an example.
Those two currencies are well known and when you compare them to Croatian Kuna, you will understand what I mean.
U.S. dollar and Euro are world currencies so they are called major currencies. Croatian kuna is not world know currency so it is called minor currency.
When you make Forex currency pair from two currencies you can get major and minor currency pair. Without going to deep into explaining about currency pairs I suggest that you read article about Forex currency pairs. There you will find out how currency pairs are made, how to read them, how they are traded, how to read value of a currency pair and which type of Forex currency pair exist.
What are Forex Basics
When you start reading about Forex, you will encounter some Forex basic terms that will be to strange or to complex to understand.
At the beginning it could be to complex to understand Forex basics because they are not used in your common life. If you are in financial sector then maybe you have heard some terms that are used in Forex.
In this section I will introduce you to Forex basic terms you will use when ever you start trading on the Forex.
Forex basics consists of the money you pay to your broker because broker offers you access to the Forex. Money you pay to your broker can be variable amount or fixed amount. I do not want to scare you but you need to know that the amount broker charges you is small amount.
Second Forex basic thing you need to know is money you can borrow from your broker in order to make more money with small amount you invest. That money is virtual money which you cannot withdraw but you can use to increase possibility to make more than you could with your invested money.
When you borrow money from your broker to make more money, your broker take some money aside just as a protection if your trading decision do not go in the right direction. Broker also use that money as an entrance to large Interbank market where all exchange is held.
There are possibilities to make a lot of money with very little change in the price of a currency pair. The amount of money is defined by the trade input you select at the beginning of the trade. You can define that small change in the price of Forex currency pair gives you $1, $10 or $100.
What is a Pip in Forex
In Forex you make money by deciding will you buy or sell Forex currency pair. When you decide will you buy or sell then the next step is to wait until the price make a movement.
If the price moves up or down you will make money. Each move of the price, up or down, is change in the price of a currency pair.
In the EUR/USD currency pair example I will set one price.
EUR/USD = 1.1234.
When the price change to lower value, for example to 1.1233, it means EUR is valued at 1.1233 USD dollars.
Small change in the price which is 0.0001 is 100 times less than a cent. If you want to see change in the price by 1 cent the price should change from 1.1234 to 1.1134. That is difference of 0.0100.
The change in the price 0.0001 is called change by the pip. Pip is small unit of the currency pair price. In our example we have change by 0.0001 which is equal to change in the price by 1 pip.
If the price change from 1.1234 to 1.1236 we will have change by 2 pips. Same analogy is when the price change from 1.1234 to 1.1232. It is change by the 2 pips.
There is a lot more what you can learn about a pip so I suggest you go to the article about what is a pip in Forex where you will learn more details. Those details will teach you how to calculate value of one pip when the price change.
When the price change you can make $1 or $100 just with small change. How is that possible is explained in the article about the pip.
Which Forex Order Types Exists
If you want to start making money in Forex you need to know how to open and close a trade. Trade is when you decide will you buy or sell currency pair based on your strategy.
If you decide to buy a currency pair and the price goes up, you will make money. If you decide to sell a currency pair and the price goes down, you will make money.
There will be times when you think that current price will come in the future to the certain level and you want to have ready order to open when that level is reached. Those are orders in the future that are open based on certain criteria.
That kind of Forex order types are possible and can be very helpful. It means that you do not need to sit in front of your computer and wait until the price reaches that level.
You can prepare order in the trading terminal and leave your computer. When the price reach that level the order will open.
If you set level when the order must close to take the profit or when the order must close if you have made wrong prediction, that is also possible.
What are Support and Resistance Levels in Forex
Forex trading requires certain knowledge and skills to be profitable. Those skills includes knowledge about support and resistance levels in Forex.
Those are level where the price make a bounce, stops at or reverse at. What the price do depends on many things.
Support level will be when the price falls down and reaches level where it stalls. That means the price have hit obstacle that prevents price moving more down.
Resistance level will be when the price rises up and reaches level where it stops. That means the price have hit obstacle that prevents price moving more up.
You can learn more about support and resistance by reading articles but the best knowledge you will get while practicing.
While drawing support and resistance lines on the chart you will see what is important thing to watch to draw them best as you can. Through time you will see which patterns occur in drawing support and resistance line which will increase your quality of drawing.
I have made examples with charts to explain to you more in details what are support and resistance lines and how to draw them. You will learn what to watch in the past that influence on the current support and resistance level.
Take a look into article about How To Draw Support and Resistance Trading Line.
What is a Trend Line
While support and resistance levels are horizontal lines that represent level where the price could bounce or reverse those levels can be dynamic lines.
What that means is that support and resistance level can move through time or it can form a range between two price levels.
When the price moves in time it can form channel in which price is making highs and lows.
When the price makes two highs or two lows we can connect those places and get a channel. Place on highs or lows that are connected with angled line will make support or resistance level.
If the channel is rising then we will have dynamic resistance levels on highs and if the channel is falling down we will have dynamic support levels on lows.
The lines that make a channel are called trend lines. I have prepared charts to explain you more in detail what is trend line in Forex so feel free to check it out.
Volatility in Forex
When the price of the currency pair is changing throughout the day it can change in one second or it can change once a while. There are different reasons why the price change and I will not get into the fundamental part what is causing price to change but I will explain what means when the price change.
Every change in the price is the opportunity for you make money. While Forex is the market on which you can make money by buying or selling currency pairs you need change in the price if you want to make money.
Above I have explained that change in the price is a Pip. Smallest change in the price can give you $1, $10 or $100 so it is important that you have change in the price often as it is possible.
When the price of the currency pair do not change you cannot make money on the Forex. Frequency of price change in the Forex is called Volatility.
Volatility in Forex is how often does the price of the currency pair changes in one period of time. For example, how often does the price change in 1 minute time frame.
If the price changes 50 times in one minute we can say that the currency price is volatile. When the currency pair is volatile it means you can expect that you can make money with buying or selling.
Volatility in Forex also means that there are many traders in the market. The reason is frequently change in the price which means many traders are selling and buying the currency pair.
Volatility is one of the biggest reasons why it is so attractive to many participants. You can expect when you enter into the trade you will be able to get out in any time because there will be trader ready to trade.
What is Spot Forex
Forex spot refers to the price of the currency at the time you see it on the trading platform.You can visualize it like “price at the spot”.
You will encounter someone says that settlement for spot market takes 2 days for most currencies. Settlement means that currencies change their owner. 2 days is referred to brokers and financial institutions not for us small individuals who trade over broker.
Because of brokers, who are market makers, settlement for us traders does not last two days because brokers take both sides of the trade. This way, our trades and our account balance is updated instantly when we open and close order.
On the Forex spot market currency pair is traded immediately by current market price. There is no waiting time for exchange price until contract expires. Trade is executed in milliseconds and trading is very simple and fast.
Reading the article what is Spot Forex you can learn more about order execution type and about Forex Futures and Option market.
This was all what you need to know at the start as the basics about Forex. You now know what is Forex and who are the participants.
To start on the Forex you know what are the basic terms which will help you understand how to make money.
When you are ready to start trading you should visit guide about Forex trading where you will learn all about tools you need to have.