The Building Blocks of the Foreign Currency Exchange

This article looks at different important aspects of the foreign currency exchange market.

Foreign Currency Exchange Building Blocks

The foreign currency exchange market has been noted as the largest and most volatile trading market in the world.  It is due to this fast-paced, highly competitive environment that traders find themselves extremely stressed and filled with anxiety.  In order to trade the forex market effectively you must have a strong trading plan and strategy, all of which comes from an awareness of the market itself.  By undergoing forex training you will learn the different workings of the foreign exchange market and your roles as a trader.  This article reviews the building blocks of the foreign currency exchange.  It is recommended that all new traders have an understanding of these different features in order to trade effectively.

The foreign currency exchange market

Unlike the stock exchange, the foreign exchange market does not operate on a set trading timeframe.  The forex market has a 24 hour trading time period from Monday to Friday each week.  In order to maintain these prolonged operating hours there are different global market sessions.  Often these sessions will overlap, and it is during these periods that one will notice greater activity among certain currency pairs.

All trades on the foreign exchange market are completed using various sized lots.  The micro lot is equivalent to 1,000 units of base currency, whereas the mini lot represents 10,000 units.  The standard lot is equivalent to 100,000 units of currency and is the most frequently used lot among the larger players on the foreign currency exchange.  It is recommended that new traders begin trading with micro lots.

The act of foreign currency exchange trading

All trades on the forex market use currency pairs which are priced to four decimal points.  The pip is the smallest increment of these decimal points making it equivalent to approximately 1% of the currency value.

As is aforementioned, the majority of new traders will begin using either the micro lot.  This is due to the micro lot being far more user-friendly than the mini or standard lots with a micro pip being equivalent to 10 cents of a price in market movement.  The lower pip allows for an easier calculation of trading profits or losses.  It should be noted that while the micro lot is simpler to use, it is also the least profitable with the mini lot having a $1 pip and the standard lot a $10 pip.

Changes in currency values

While many new forex traders are beginners in the trading world, there are those who are transitioning from other financial markets.  Some stock investors choose to diversify their trading portfolios by entering the foreign currency exchange market.  While there are certain similarities, these two markets are very different and stock investors are advised to undergo some training.  One of the main similarities is that of currency supply and demand.

The supply and demand principle implies that when a currency’s price increases in value, it will be in demand increasing the country’s economy.  If too much of the currency is supplied then it will go down in value and influence the country’s economy negatively.

 

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