What is Forex? Definition & Meaning - nextmarkets FX Glossary

Last updated: 23.01.2020
Paul Langham
Author:
Paul Langham
Adviser
CFD & Trading
Experience
> 30 years

Forex, also known as FX, Foreign Exchange and currency trading, is a name given to the global, decentralised market for trading currencies. So what is Forex? The Forex market is the largest and most liquid market in the world. Every day, $5 trillion of trades are made across the world.

Even if you add up the collective worth of all of the stock markets in the world, you don’t come close to that figure. The passages below will explain what is Forex trading and how it works, as well as where to start with nextmarkets Forex trading for beginners.

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What is Forex?

Forex is a portmanteau word shortening the full name Foreign Exchange. It is the most common way of referring to the global foreign currency market. There are several other ways of referring to this market as well as Forex, including FX, Foreign Exchange and currency markets. Forex is a global, decentralised marketplace where individuals and companies can buy and sell foreign currencies, exchanging one for another.

This usually takes place through a Forex broker, as individuals cannot gain access to the markets on their own. Anyone can speculate on foreign currencies, provided that they subscribe to this access to the market through a brokerage platform or the nextmarkets Forex trading app. There are now a number of Paypal Forex brokers to make investing money even easier than it has been before.

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What is Forex trading according to nextmarkets?

Forex trading is the name given to the practice of exchanging currencies within this market. Instead of buying stocks, shares, or commodities, Forex traders exchange money in one type of currency to money in another. The Forex market is unique in that it is not just professional traders who buy and sell currencies; the general public also has access to the practice of trading in currencies thanks to their nextmarkets account.

This takes place by using online forex brokers which provide investment ideas and the ability to learn from expert traders. If you have ever purchased anything in another currency, at some point you will have made a Forex trade. That trade can either come at the time of purchase if you are using a credit or debit card, or it may have been made earlier if you exchanged money for cash in another currency before you arrived. By registering with nextmarkets, you have access to the exciting world of trading.

How does FX work with nextmarkets?

What is Forex trading and how does it work? FX trading relies heavily on the exchange rates between different currencies. Exchange rates are a fairly familiar concept for any overseas traveller, and they simply refer to how much of one currency you can buy with a certain amount of another currency. Exchange rates are constantly fluctuating due to changes in supply and demand, so the relative prices of different currencies are always changing. This is where the opportunity lies in Forex trading on the nextmarkets platform.

By reading the market for Forex signals, traders can try to predict where the prices are heading. If you exchange some US dollars for British pounds, and the comparative price of British pounds increases, you could exchange them back into dollars and make a profit. This is the basic principle which underpins Forex trading and answers the question: what is Forex market trading?

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How to start trading in foreign currencies on nextmarkets

Anyone can trade in foreign currencies because there are so many different ways in which currencies can be exchanged. Trading currencies on nextmarkets, even for people with no training and very little money to invest, is still a perfect possibility. However, becoming a Forex broker is a different story.

In most countries and jurisdictions, Forex brokers must be licensed as companies before they are able to legally make money from Forex brokerage. There may well be additional steps which you have to take to ensure that you are eligible to register as a Forex broker. It’s important to check what the rules are in your jurisdiction so that you don’t fall into this trap.

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Before you get started trading on the Foreign Exchange market on nextmarkets, there are a few things you should know:

  •  The majority of Forex trades take place in the spot market, where trades happen at current prices and in real time.
  •  It used to only be possible for institutions with at least $40 million to trade in Forex markets. Today it is possible with much smaller investments.
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Talking about differences

The Forex spread is one of the main ways in which Forex brokers earn their money. When a Forex trade is opened through a broker, they are the ones who pass it through to the market on your behalf through the nextmarkets Forex trading software.

The price that they will offer you to buy or sell currency is slightly different to the price that they are able to get through the market. This is essentially a small commission which is added to each trade by the broker, instead of being taken from your account balance. The difference between the price of the bid price and the offer price (the money the broker collects) is known in Forex as the spread, and here at nextmarkets, we provide competitive rates.

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Forex Leverage makes the market so attractive

The possibility to trade with high leverage is one of the key reasons why the Forex market is so attractive to both professional and amateur investors. By trading with leverage, traders can borrow an amount of money to invest in a trade. In the Forex market, it is usually the Forex broker who lends the money for the trade.

In some circumstances, traders may be able to borrow up to 400 times the amount of capital that they have in their account. The broker puts up the rest of the money for the trade, and the trader is able to make much higher profits, and losses, compared to their initial nextmarkets account balance.

What is the Forex market?

The Forex market is the space in which global currencies are exchanged. It is known as an exchange as trading currencies always involve buying one currency and selling another simultaneously. Quotes for Forex trades are always written as a currency pair, including the currency which is being sold (also called the quote currency) and the currency being purchased (also known as the base currency). There are a huge number of global factors which might affect the price movements of particular currencies and currency pairs, but largely the price of a currency will reflect the economic performance of the country or countries to which the currency belongs. With nextmarkets, traders have access to a wealth of information that will guide them through their forex journey.

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Types of Foreign Exchange trading

There are three different types of Foreign Exchange trading, known as the spot market, the futures market and the forwards market. The spot market is currently the largest of these three markets as it is the what the forwards and futures markets rely on for their pricing and structure. The spot market is the place where traders to buy and sell currencies at the current prices and in real time.

It has seen a renewed interest recently as electronic trading has made it easier for individuals and institutions to access real-time Forex markets by opening an account with nextmarkets. The forwards and futures markets trade in agreements, rather than actual currencies. These contracts represent a claim on a currency to be redeemed at some future point. The price is agreed in the present, but the settlement is delayed. Here, traders speculate on what the currency prices will be further down the line.

Does the Forex market trade 24 hours a day?

The Forex market is an over-the-counter market, meaning that trading can take place 24 hours a day on the days that the exchanges are open. In the case of the Forex market, trading takes place over five and a half days of the week. You can check a Forex calendar platform for exact opening times every week of the year. The decentralised nature of the market is the reason behind the 24-hour trading. The fact that institutions all over the world are doing this creates a 24-hour global exchange.

It is widely recognised among Forex traders that just because technically Forex trading hours are 24 hours a day, it doesn’t mean that you should. Day traders maintain that it is best to make your trades on nextmarkets during a period of high trading activity, rather than overnight when there is very little trading happening (see also What is Day trading?).

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Forex trading glossary on nextmarkets

Before you fully have an answer to the question “what is the Forex market?”, it is important to get to know the various phrases and terms which are crucial to understanding Forex. It is also a good idea to set up a Forex demo account with nextmarkets where you can learn all about Forex by trading with virtual funds.

There are some terms which are the same across different forms of trading, such as stocks, shares and commodities, but there are will be other words and terms which are unique to the Forex market. Before you can get to grips with the Forex market and make your first trade, you should look at a Forex trading glossary to familiarise yourself with any new Forex trading terminology. Understanding the terminology is key to understanding the rules of the market and the ways to play it.

How much can you earn from Forex trading?

First, let us consider just what Forex is. It’s a form of financial speculation. This means that you have to put a considerable amount of capital into the market in order to be able to make any sizeable returns. If you have very little capital to invest to begin with, you will not become rich overnight through Forex trading. The highest returns come from large investments. But of course, as with all speculation, large investments also carry large risks.

Even the best Forex broker will not earn a profit on every trade. Forex trading is not set up to be a “get rich quick” scheme. If you already have some money, it is theoretically possible to make that money work for you through the Forex markets and increase your existing wealth. But Forex trading will not make money appear in your bank balance out of nowhere. For beginners, the nextmarkets demo account is a good place to start.

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Did you know

The Forex market will challenge your assumptions, even for well-versed traders on nextmarkets. There are many facts which might surprise you to learn, such as:

  • The Forex market is the largest financial market in the world.
  • The US dollar is the most widely traded currency in the world, with 80% of global trades featuring this currency.
  • Although USD is the largest currency, only 19% of Forex trades take place in the US. 41% happen in the UK.

Understanding Forex trading terminology

There are a large number of words which are vital to understanding the Forex markets. Some of these are specific Forex trading terminology; however, there are many words which are used across all market speculation on nextmarkets, including FX markets. The most important include:

  • Leverage – This is another word for margin. It is the percentage or ratio increase in their capital which traders are allowed to trade. For example, if a trader has a leverage of 10:1, it means that they can trade with values 10 times higher than the actual capital they have available.
  • Pip – The smallest unit which is traded for any currency. Trades are not limited to the 2 decimal points which are usually observed when using currency. One pip usually equals 0.0001 of a currency.
  • Spread – The difference in price between the broker’s bid and offer prices.
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Foreign Exchange trading meaning on nextmarkets

Trading can be defined as the act of buying and selling goods and services. In the financial trading markets, this usually involves the exchange of one financial instrument for another. What is Forex trading compared to other types of financial trading? Foreign exchange trading is the exchange of an amount of money in one currency for an amount of currency in another currency. Traders can facilitate these trades on their nextmarkets account.

Foreign exchange trading can be done by amateur individuals acting through a broker, or it can be done by professionals on behalf of companies and institutions. Although technically any exchange of one currency for another could be considered a trade, to count as Forex trading, the motivation for the trade must be to earn profit from the exchange.

Forex trade defined on nextmarkets

A Forex trade is different to a simple exchange of currency. When you exchange money to take abroad, the main motivation is to facilitate purchases in a different country. It is an exchange of necessity, as you will not be able to purchase any goods or services in your own currency.

The idea is not to exchange the currency back again at the end of the trip abroad, and at no point are you intending on making a profit from your exchange. So, what is Forex? A Forex trade is an act of speculation on the Forex market. The intention is always to make a profit, and to turn those profits back into your own currency. The nextmarkets Forex signals app can help you on the way to these profits by flagging up Forex indicators to you.

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Making money in two different ways on nextmarkets

A Forex broker is a company which provides foreign currency traders with a trading platform. This platform will allow them access to the Forex market, where they can buy and sell quantities of currencies easily and without having to go through a separate vendor. Forex brokers earn their money in two different ways. Firstly, they will make sure that there is a discrepancy in the prices between the buy and sell price of each of their currency pairs.

For instance, they might purchase euros from traders at a cost of 0.8020 GBP, but they might sell euros for a cost of 0.8030 GBP. They would, therefore, be making a small percentage on every trade. The second way of making money is to charge for every trade made on their platform. nextmarkets is referred to as Forex brokers, currency trading brokers, and retail Forex brokers.

Forex trading location

The Forex market is completely decentralised, which means that a global network of international banks makes up the market. There are different centres of activity, the largest are New York, Tokyo and London. The majority of trading takes place from these market centres, and during times when these are open.

However, some trading also takes place when smaller centres such as Frankfurt and Sydney are open. The market will be most active when more than two of the market centres are open and trading at the same time. It is worth having a look at Forex clocks or market time converters to get an indication of the best times to execute your trades. nextmarkets provides traders with insight into all these different markets, which makes trading a little easier.

Successful Forex trading with nextmarkets

To be successful, novice traders also need to understand the theory behind Forex trading strategies. There are four key elements to successful Forex strategies:

  • Currency selection – traders must decide which currency pair(s) they would like to trade. It is best practice to pick one or two pairs to begin.
  • Entry points – are you going to aim for long or short positions with your trade?
  • Exit points – what are the signals which will determine when you exit a trade?
  • Investment size – how much are you willing and able to invest at a time, especially whilst still learning about the trading environment?

To help you on your journey, the nextmarkets platform offers educational materials, tutorial videos and the opportunity to follow and even copy the trades of the pros. Take your first step by setting up your free nextmarkets trading demo account today.

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