Forex, with its 4 trillion US dollars of average daily turnover, is by far the biggest financial market in the world
Forex – decentralised, global, working 24 hours per day from Sunday till Friday, is one of the symbols of the financial system of the post-industrial era. Whenever one currency is traded against another, we are talking about the foreign exchange market.
Due to the immerse liquidity provided by all the financial centres from Sydney to New York, currency pairs such as the EURUSD and USDJPY draw the attention of institutional and individual traders from all around the world.
Why Forex market is so popular?
- Highest liquidity in the world means also the lowest transaction costs for traders.
- Trading can be carried out 24 hours per day, from Sunday night till Friday evening.
- Volatility and financial leverage, combined with a broad range of currencies to choose from, offer many unique trading opportunities.
- Different currencies react to different factors and move independently, giving the possibility for proper diversification.
What moves the Forex market?
Currencies can be considered as a representation of the relative strength of the economy of a given country. The specific condition of such an economy is influenced by many different factors, and so is the strength or weakness of the given currency. The main market movers are economic news and political conditions, and many claim that the market psychology is no less important.
If you want to learn in detail how to analyse the fundamental condition of a given currency, please refer to our Fundamental analysis of FX markets section.
Many traders combine the knowledge about the fundamental conditions of a given market and the analysis of the graphical charts, in order to prepare the actual trading decision. If you want to learn more about the chart analysis, you can refer to our Technical analysis section.
Most interesting facts
- The daily turnover on the Forex market is approx. 16 times higher than the volume of all the stock exchanges in the world combined together
- The US Dollar is the most popular currency, taking part in approx. 85% of all transactions.
- The biggest share of the turnover have banks located in the UK – 37%, along with the US it constitutes half of global trading.
- The most popular markets are the EURUSD, USDJPY and GBPUSD, constituting almost half of all transactions.
Forex Trading Example
Opening the Position
Opening price of the EURO against the US Dollar (EUR/USD) is 1.25412
You decide to sell 1 standard lot (the equivalent of $100,000) at 1.25412.
Margin required to open the position is USD $125,412/300 = USD $418.04.
Closing the Position
Closing price of the EURO against the US Dollar (EUR/USD) is 1.24323
One week later the EURO has fallen against the US Dollar to 1.24323, you decide to take your profit by closing your selling position.
Market movement = 1.25412 – 1.24323 = 1089 points =108.9 pips
1 pip of EUR/USD (per 1 lot) = $10
Gross profit on Trade = USD $10*108.9 = USD $ 1,089