Forex market basics: how the currency market works and what beginners need to know

Forex (Foreign Exchange Market) is the largest and most liquid financial market in the world where currencies are exchanged. For beginners, understanding the basic principles of Forex is key to successful trading. In this article we will look at the main aspects of the foreign exchange market, its structure, participants, trading mechanisms and important terms.

Forex market structure

The Forex market is a decentralised network where participants exchange currencies. Unlike stock exchanges, Forex does not have a physical location where trades take place. Trading takes place through electronic platforms and networks that connect participants from all over the world.

The main elements of the forex market structure include:

• Banks: Large banks and financial institutions that act as market makers and provide liquidity in the market.
• Brokers: Companies that provide traders with access to the forex market, often providing trading platforms and analysis tools.
• Traders: Both professional traders and retail investors who actively participate in currency exchange.
• Central Banks: Institutions that can influence the market by intervening in currencies and changing monetary policy.

Forex trading mechanisms

Forex trading is carried out through the buying and selling of currency pairs. The main trading mechanisms include:

• Currency Pairs: Currencies are traded in pairs, e.g. EUR/USD (euro to US dollar). The first currency in the pair is the base currency and the second is the quoted currency.
• Exchange rate: The price of the base currency is expressed in the quoted currency. For example, if the EUR/USD exchange rate is 1.2000, it means that 1 Euro is worth 1.2000 USD.
• Lots: Forex transactions are conducted in lots. A standard lot is 100,000 units of the base currency, but there are also mini lots (10,000) and micro lots (1,000).
• Spread: The difference between the buy and sell price of a currency pair. The spread is a major source of revenue for brokers.

Basic Forex Terms

To trade successfully, it is important to understand the basic terms associated with forex:

• Pips: The minimum change in the price of a currency pair. For example, in the EUR/USD currency pair, a change from 1.2000 to 1.2001 is one pip.
• Margin: The amount of money a trader must deposit to open and hold a position. It is a kind of deposit that guarantees the execution of a trade.
• Leverage: The ability to manage large positions using a small amount of capital. For example, with a leverage of 1:100 you can manage a position of 100,000 units with only 1,000 units of capital.
• Order: An instruction to buy or sell a currency pair. The main types of orders include market orders and limit orders.

Tips for beginners

If you are just starting to trade forex, here are some useful tips:

• Learn the market: Before you start trading, take the time to learn the basics of Forex and explore different strategies.
• Use a demo account: Start with a demo account to familiarise yourself with the platform and practice without the risk of losing real money.
• Develop a strategy: Create a trading plan that includes goals, strategies and risk management rules.
• Follow the news: The impact of economic and political events on currency exchange rates can be significant, so it is important to keep up to date with current news.

The forex market can offer many trading opportunities, but it is important to start with the basics and develop your skills. Understanding the market structure, trading mechanisms and key terms will help you become a more confident trader and make informed trading decisions.