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What is Forex?

Trading on Forex revolves around the concept of CFD (Contracts for Difference), where you’re basically estimating the future price ratio between two currency pairs. Have you ever been to the exchange office before going on a vacation? Have you ever waited for your desired currency price to drop so that you can get more “bang for a buck”? Then you were closer to the Foreign Exchange market than you think.
Having one currency changed for another at the exchange office is called Spot Forex trading and as similar as it may sound, it’s still not exactly the same as Forex trading. If it was you would might as well go to the nearest exchange office to start trading. So, what exactly is the Foreign Exchange market and how is it different from Spot Forex?

What is CFD?

The main difference between Spot Forex trading and Forex trading is that the latter functions on the basis of a so called CFD. Thanks to CFD (Contracts for Difference) you don’t need to worry about not having a real foreign currency in your wallet, you also don’t need to rush to the nearest exchange office to purchase some.
That’s because trading is being done on a strictly speculative basis where neither of the currency pairs is actually used by any of the sides involved in the process. Instead, the Contract for Difference between trader currency pairs is signed
And because speculating is all about guessing the price fluctuation which can be positive or negative, it means you can also speculate that price between certain currency pairs will go down. This is known as going short or a Short Position.

Another of the (many) Forex principles is called Leverage and thanks to this, traders can speculate with amounts that often exceed their actual financial capacities. Using leverage can often lead either to higher profits or, unfortunately, also to higher losses. That’s why very high leverages are offered to professional traders only. Others can trade with leverage up to 1:30, therefore trading amounts 30 times higher than their deposit. Bear in mind, that utilizing Leverage is entirely up to you and your trading strategy, it’s not a prerequisite for Forex trading itself.

When can I trade?

Given the name “Foreign Exchange market” it goes without saying that the Forex market is the very definition of an international market. But what is less obvious is when the Forex market is active, in other words, when you can or cannot trade forex. Forex is open 24 hours a day but only on business days. That’s why if you decide to become a professional Forex trader, you can still enjoy your weekends just like most of us do.

Each trading day is divided into so-called sessions, these react to movement of the sun as it passes over the main financial centers around the globe. The first session begins in Sydney on 23:00 (GMT +2) of CET, after that comes Tokyo followed by London. The last financial center to join this cycle is New York which also closes it at 23:00 (GMT +2) CET.

When it comes to Forex we also need to mention its high liquidity. This is caused by the massive number of financial transactions made on a daily basis. Daily trading volume of the whole Forex market is estimated to be somewhere around 5 trillion USD (for example average daily trading volume in all stock exchange markets in 2013 combined was around just 48.5 billion USD!). This means Forex is one of the biggest financial markets in the world.

And what does high liquidity even mean? It means that as a trader, participating in a high liquidity market you are more likely to buy/sell for the price quoted in your trading platform.

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