What is Forex? Unknown Facts & Figures (The Ultimate Guide)

Forex prices are shown in up to four or five decimal places like 1.4000 or 1.40000. The only exception to this rule is the pairs of JPY (Japanese Yen). They show up as two or three decimal places, like 112.50 or 112.500. The smallest decimal point is the pip value.

The pip is the smallest point for the currency pair and equals 1/100 or 1 percent. Suppose the price of EUR/USD moves from 1.1950 to 1.1960. Then the pair moves ten pips. In forex, you have various lot sizes that help you trade.

There are three types of lot sizes; micro, mini, and standard. A micro lot is 1,000 units of currency and would equal $0.10 if you were trading US dollars. A mini lot is 10,000 units of currency, or $1 if you are trading dollars. A standard lot is 100,000 units of currency, or $10 if you trade dollars.

One thing I should mention involves the terms ‘long’ and ‘short.’ Going long means you are buying the pair, and going short means you are selling the pair. Making a trade involves pips and lot sizes.

Let’s say you buy EUR/USD with a standard lot size. Each pip in your favor will increase your profits by $10. So, if you make 20 pips, your profit is $200 because 20 x $10 = $200. Ok, let’s turn to a micro lot.

If you have a favorable pip movement of 20 pips, then your profit is 20 x $0.10 = $2. You see, size matters in forex. As we are in the trading process, I’m gonna divert your attention to leverage. Often described as a double-edged sword, leverage is how you take substantial positions in the market.

Leverage is a ratio (e.g., 1:10 or 1:100) that gives you more purchasing power. Your chosen forex broker gets to decide how much leverage you’re going to get. For example, you got leverage of 1:100 on a $1,000 account You can open a position for $100,000. You see why this is a double-edged sword; it can magnify your profits and losses.

Unlike the stock market, the forex market has no central marketplace. All the trading happens electronically over the counter, aka OTC. Traders and financial institutions from around the world place their trades electronically. The forex market runs round the clock 24/5, allowing you to trade whenever you want.

There are four forex trading sessions, in Sydney, Tokyo, London, and New York. The market wakes up in Sydney at 11 PM GMT and then sleeps at 8 PM in New York. When the trading day in New York ends, Tokyo and Sydney’s session starts. That’s why I love the forex market because it doesn’t restrict me to specific hours.

I can trade which pair I want around the clock. There you go, I have finished describing the forex essentials in less than 1k words, as promised. But I want to make it clear that there’s more to forex trading than this.

So, you can get an in-depth idea of what forex trading is. See which markets trade 24/7, even on weekends.

Making money is all about analyzing the market and taking your positions at the right time.  By analyzing the market, I mean by doing technical and fundamental analysis.

Technical analysis tells you the pair’s movement by depicting it on a chart.  Within technical analysis, we have technical indicators that show where the price is heading. Fundamental analysis is all about external factors. They can be economic, political, or something else altogether.

Even natural disasters can make an impact on the pair. You combine both technical and fundamental analysis to make money in forex.  But let’s be realistic for a moment.

You are not gonna make gazillions in the first few days or months. What you need to do is learn the art and then practice, to test your strategies. Keep the emotions out of your trading.

Daily Turnover

As I’ve told you earlier, the forex market is the largest financial market, bigger than the stock, commodity, and bond markets. The forex market is 35 times larger than the stock market. Imagine a baby and a giant. That’s how big the forex market is compared to the stock market.

The daily turnover of the forex market rose from $1.2 trillion in 2001 to $6.6 trillion in 2019. The market is currently worth $2.4 quadrillion. Forex is the only financial market open 24 hours a day, five days a week.

Major players in the forex market

With this big a market, you wouldn’t expect it to be controlled by just two guys in a basement. The market involves various players and has a hierarchy. It starts with financial institutions like central banks, commercial banks, hedge funds, and investment managers.

Then we have retail traders like you and me. Big players move the market due to their massive volume. Retail traders make up about 5.5 percent of the entire forex market. Still, we can make some cool pips, right? 😎

Forex currencies

Did you know that over 170 foreign currencies are traded on the forex market? The US dollar is the most widely traded currency in the world. It accounts for around 73 percent of all worldwide trades.

The euro (EUR) comes next, accounting for around 39.7 percent of global trade. The third most traded currency is the Japanese yen (JPY). It contributes 25.7 percent of all trades.

With 20.7 percent of worldwide trading, the British pound (GBP) is the fourth most traded currency. The Australian dollar (AUD) comes next, followed by the Canadian dollar (CAD), Swiss franc (CHF), and New Zealand dollar (NZD). Fun fact: The Swiss franc is often regarded as the most stable and safe-haven currency.

Forex pairs

As I mentioned above, forex is traded in pairs. Seven currency pairs account for more than 70 percent of all forex market transactions. They are known as major pairs. They are EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CAD, NZD/USD, and USD/CHF. EUR/USD is the most traded pair in forex. Those pairs that don’t include USD are minor forex pairs.

Examples of forex minors include EUR/JPY, GBP/JPY, EUR/GBP, CHF/JPY, EUR/AUD, NZD/JPY, and GBP/CAD. The third type is exotic pairs. They comprise a major currency with currencies of developing nations. Examples include USD/HKD and USD/SEK.

Demographics

So, what are the forex market’s demographics? Men account for the vast majority of forex traders, with women representing only about 12 percent. Women are better traders than males, however, according to research conducted by Warwick Business School. By taking fewer risks and creating long-term strategies, they outperform their male counterparts.

When it comes to age ranges, 43.5 percent of traders are between 34 and 45. Millennials, often known as Generation Y, account for around 5 percent of all forex traders. Retail forex traders over the age of 45 account for 15 percent of all traders.

Final thoughts

Forex trading isn’t a complex equation. It’s all about learning and honing your strategies. By keeping track of the market stats, you can get more involved in the industry. Then you’ll eventually become a pro trader.