What Forex means?

Trading terminology is a formidable opponent to anyone trying to get into the business. It seems like an entirely inexhaustible list of terms is in front of you. Sometimes, it feels like the more you learn, the less you know since new unknown terms pop up every time you make progress.

One of the most significant barriers to entry into trading is learning the terminology. An additional layer of difficulty comes from some terms meaning two things. Some people use terms interchangeably where they shouldn’t, creating even further confusion.

To alleviate that issue, we’ve decided to explain Forex today. We’ll go over the foreign exchange market as a ground for traders as well as everyday Forex uses. Once you finish reading, you should have a fairly clear image of what’s going on.

Forex as an Everyday Market

In its essence, Forex is the currency exchange market. Even its name is an abbreviation of foreign exchange. So let’s say you’re a US citizen on a trip to Italy. Of course, you’d go to an exchange office and swap your dollars for euros. Doing so, you’ve participated in the Forex market.

Let’s look at an alternate case where you have a card with the euro as its default currency. You’re buying from an online retailer that only accepts payments in dollars. So, once you make the payment, your bank automatically makes the conversion, and it’s another example of Forex market participation.

Of course, that doesn’t only apply to individual purchases. If the US is buying something from the EU, the latter can request a euro payment. That means the US would need to buy euros with dollars and then make the payment.

Why Is That Important?

Like any market, Forex is largely fueled by supply and demand. If you’re a country, you likely want to strengthen the position of your currency. As such, you’d try and create demand wherever you can.

Of course, that isn’t the only part of the Forex equation. There are also interest rates dictated by the central banks, for example. However, let’s leave that for some other time, as Forex value determination is a fairly complex topic.

For now, we have something more adequate for the beginner-intermediate level. Let’s look at how online traders make money on Forex.

How Does Online Forex Trading Work?

Here, we’ll assume you already know about online brokers. So you sign up, make your deposit, and open the platform. You navigate to the Forex category and see something like EUR/USD. What does that mean?

You always trade Forex in pairs. You can view it as buying one currency for the other. The first part of the pair is always one you’re buying. That introduces our next point.

Forex pair prices are determined by the relation of their two components. As a rule of thumb, you want the first price to rise and the other to fall. As long as the first component is gaining more value than the second, your Forex pair will increase in price.

So let’s look at the EUR/USD pair for some fringe cases. If EUR goes up and USD goes down, it’s clear the pair is gaining value. Furthermore, if the USD is going up and EUR is rising more steeply, it’s still in the green. Even if EUR falls, the pair can still gain value if the USD falls more steeply. It can be a bit much to wrap your head around at first, but you’ll quickly get the hang of it.

Forex Pair Types

Lastly, we arrive at the different Forex pair types that can serve as a solid trading guideline. First, you have the majors that are made out of USD and another major global currency. The EUR/USD pair we mentioned as an example is one of them, and there are seven in total.

Then, you have minor pairs that are a bit more volatile, meaning less safety but more earning potential. They are made out of two significant global currencies but don’t include USD.

Lastly, we have exotics, which are pairs of one currency from developing or fringe economies and one major currency. They have the largest earning potential but are by far the riskiest. Beyond normal trading risks, they often have liquidity issues that prevent your trades from going through at the right time. That makes them a poor choice for beginners, and even some experts consider specific exotic pairs a gamble.