What is Foreign Exchange aka Forex, FX or currency trading?

What is Forex?

Forex is a globalized decentralized marketplace where currencies around the world are traded. The forex market is the world’s largest and most liquid financial market with trading exceeding USD2b daily. Currency trading is done over the counter (OTC) which means that all transactions occur over computer networks. The forex market for retail investors is open 24 hours a day for 5 days a week from Sunday 5pm EST (Monday 5am Malaysia) until Friday 4pm EST (Saturday 4am Malaysia).

The forex market are traded in three markets:-

  • Spot market: where currencies are traded according to current price.
  • Futures market: where futures contracts are traded based upon standard size and settlement on public commodities market.
  • Forward market: where contacts are bought and sold OTC between two parties with terms both parties agree on.

What Affects Forex Pricing

  • Interest rates and monetary policy determined by central banks like the US FED and BNM.
  • Economic GDP growth with higher consumer spending leading to domestic currency appreciation.
  • Trade balance which is positive with a trade surplus of imports vs exports, or a trade deficit with exports higher than imports.
  • Inflation rate with higher growth and higher interest rates leading to domestic currency appreciation.
  • Unemployment rate where a high unemployment rate reduces spending and interest rates.
  • Political stability where foreign investors prefer save haven currencies such as USD, Euro, GBP and JPY.
  • Market factors especially commodities such as oil which affects oil-producing countries positively/negatively.
  • Natural disasters or pandemics which affect GDP growth and lead to central banks cutting rates.
  • Currency speculation by large institutional speculators betting against the currency of a particular country.

 

What is Forex Trading?

Forex trading is to exchange one currency for another in the expectation tat the price will change. Forex trading involves simultaneously buying one currency for another (unlike other investments like shares where you must wait for a matched price between a buyer and seller).

All Forex trading is done in pairs between two currencies. Currencies are usually priced to four decimal points where the smallest trading point percentage is known as a pip. Currencies move up and down affected primarily by supply and demand. Information including interest rates, economic data, geopolitical factors, and positive/negative news affect currencies. Forex trading costs are determined by the bid (buying) – ask (selling) spread (price difference).

Understanding PIPS

Forex is quoted in pips (aka percentage in points) with up to 5 decimal points. Lot sizes can be categorized as standard, mini, micro or nano lots.

  • Standard Lot (1.00): Each pip will be worth $10.00.
  • Mini Lot (0.10): Each pip will be worth $1.00.
  • Micro Lot (0.01): Each pip will be worth $0.10.
  • Nano Lot (0.001): Each pip will be worth