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Forex Market Basics

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Everything !!!!!! You need to fully understand the Forex trading market!

Chapter 1-Forex Market Basics

You will learn:

  • What is a Forex market?
  • Understanding that speculation is the key!
  • Currencies traded across the world!
  • How financial markets and currencies climb!

currency marketThe Foreign Exchange Market trades currencies. The Foreign Exchange Market (Forex) is the most traded financial market in the world. The purpose of the Forex market is to facilitate international trade and investment. Various businesses want to convert one convert one currency to another, and Forex market helps in that. For example, it permits an Indian business to import American goods and pay Dollars, even though the business’s income is in Indian Rupees.

Whether it’s an Asian pension fund investing in American Treasury bonds, or a British conglomerate purchasing a Chinese manufacturing facility, each cross-border transaction passes through the Forex market at some stage. Moreover, it’s a market that never sleeps; it is open 27×7, enabling traders to act immediately to news and events. It’s a market where trade worth half-billion-dollar can happen in a matter of seconds and the same may not reflect on prices, while the same is not the case with any other market.

Getting into Calculations

Can you imagine the volume of transactions in the Forex market per day? It is more than $2 trillion. That’s a mind-blowing number, isn’t it?

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To have a comparative overview, it is about 10 to 15 times the combined trading volume of all the world’s stock markets. Click here to learn how to calculate profit or loss in Forex market?

Speculation is the key

The amount based on speculation is much more than the volumes of commercial and financial transactions in the currency market. Speculation is about traders buying and selling on a short-term basis depending on minute-to-minute, hour-to-hour, and day-to-day price fluctuations. Estimates say that more of 90 percent of daily trading volume comes from speculation (meaning, commercial or investment-based transactions account for less than 10 percent of the average daily volume). This shows that the liquidity of the overall Forex market is incomparable to any other global financial market in the world. The majority of spot currency trading, approximately 75 percent, happens to take place in the “major currencies,” i.e. the currencies of world’s largest and most developed countries. Moreover, activity in the currency market majorly functions on a regional “currency bloc” basis, where the bulk of trading takes place between the USD bloc, JPY bloc, and EUR bloc.

Getting liquid without getting soaked

Liquidity refers to the level of buying and selling volume available at any given point of time for a particular asset or security. The higher the liquidity, the easier and faster it is to buy or sell a security. From a trading point of view, liquidity is an important consideration because it tells us how fast the prices can move between trades. Since Forex is a highly liquid market, it can see transactions worth millions of dollars without any significant price changes. On the other hand, an illiquid market tends to see price fluctuations more quickly even on relatively lower trading volumes.

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