What is Forex?
The foreign exchange market, also known as Forex, is the decentralized international market for buying and selling currencies.
Forex is the largest financial market in the world; It is also known as the foreign exchange market, FX or currency market.
Forex allows companies and individuals to convert currencies. We all take part, at the simplest level, when we travel abroad and sell the currency of our country of origin in exchange for the liquidity we need for our expenses abroad.
Forex, beyond the transactions carried out by individuals and companies, is important for financial institutions, central banks and states. It facilitates trade and investment at the international level as it allows companies that earn money in one currency to buy goods and services in another currency.
Negotiating on Forex allows you to speculate on the relative performance of one currency over another.
Forex is the most popular financial market in the world, with a colossal volume of transactions made each day. The majority of these transactions are carried out by speculators who buy and sell on fluctuations in intraday prices.
The daily trading volume on the Forex market is estimated at over US $ 4 trillion worldwide. Commercial and financial transactions account for only about 10% of this volume of transactions.
The large number of investors and the impressive amount of currency traded each day give Forex an exceptional level of liquidity. This means that it is a particularly easy access market for all; You can usually buy currencies on demand, because there is always someone else somewhere to accept to sell them or vice versa.
Moreover, currency markets are not dependent on commission systems, which sometimes complicate certain other markets. In general, a small initial down payment is sufficient to begin with and transaction costs are low. Negotiations take place day and night and allow leverage to be leveraged.
Forex prices are always quoted in currency pairs. This is because you buy a currency by selling another currency.
Each of the pair’s currencies is recognized by a three-letter currency code, for example EUR / USD (euro against US dollar), or GBP / USD (pound sterling versus US dollar).
The first currency indicated in the pair is the base currency. It is sometimes called the primary currency. The second currency of a Forex pair is known as the quoted currency or counterpart currency.
A Forex course indicates the amount that a unit of the base currency allows to buy in counterpart currency. In the example GBP / USD = 1.63792, a pound sterling equals $ 1.63792. To buy a pound, you have to sell $ 1.63792. If you sell a pound, you get $ 1.63792.
Example of operation
Let’s assume that an article in the news led you to believe that the pound will appreciate against the Australian dollar. You decide to buy £ 10,000 GBP / AUD at 1.41703, at a cost of $ 14,170.30 A. A few weeks later, the course is at 1.52703, which means that the £ 10,000 you hold has increased in value. You decide to take your winnings by converting your books back into Australian dollars, for a profit of $ 1100 A (15,270 — 14,1703). You can see the details of the transaction in the table on the right.
|Achat 10,000 x 1.41703||10,000||←||14,1703|
|Le cours du GBP/AUD s’apprécie||↓|
|Vente 10,000 x 1.52703||10,000||→||15,2703|
|Bénéfice réalisé sur la différence||—||1100|
Long and short positions
According to your feeling, you can either buy (long position) or sell (short position) in the currency market.
Let us assume that for some time you have been watching the euro and you think it will appreciate. In this case, you take a long position on the EUR / USD. In other words, you buy euros and sell dollars simultaneously.
If you think the euro will depreciate, you take a short position on the EUR / USD. This means that you sell euros and buy dollars.
A quote on Forex always includes two courses: a bid price and a ask price. The difference between the two represents the spread. This difference represents the expenses that the broker incorporates into the price.
The purchase price is the price at which you can buy a unit of the base currency.
The selling price is the price to pay to sell a unit of the base currency.
Let’s look at the EUR / USD quote on the right.
The purchase price (or ‘ask’) is the amount you pay in dollars (1,28944) for each euro bought. This represents the maximum that the broker will be willing to pay for euros, selling US dollars.
The bid price of 1.28952 is the amount you receive in US dollars for each euro sold.
The fluctuations of a currency are measured in points. A dot is usually the fourth digit after the decimal point. So for the EUR / USD, a fluctuation of 1.28944 to 1.28952 represents a point.