• The Forex market basics created a strong foundation for anyone wanting to step into the exciting world of currency trading. Forex has steadily become one of the most liquid and dynamic financial markets. Before entering the trading world, it is crucial to understand how a trading platform, or a forex trading online platform, operates, as these tools allow traders to evaluate market movements, execute trades, and monitor fluctuations in the exchange rate in real time. By mastering the concepts of currency pairs and exchange rates, beginners can easily make informed trading decisions and navigate through the forex market with greater confidence.  

What is the forex market? 

• The forex market is a short form of foreign exchange market, it is a global, decentralized marketplace where participants purchase, sell, exchange, and predict the value of currencies. In the year 2022, forex markets have become the largest and most liquid financial market globally, with an average trading volume of more than 7.5 trillion USD.  

• The forex market plays an important role in international trade and investment by allowing currency conversion, assisting companies to easily manage their exchange rate risk, and offering liquidity across global economies. It enables governments, corporations, and individuals to operate across borders effectively, from settling import-export transactions to facilitating global investment flows easily.  

What are currency pairs? 

• A currency pairs showcase the quotation of two currencies where the value of one currency is compared to another. The first currency is known as the base currency, while the second currency is called the quote currency. A currency pair shows how much of the quote currency is required to purchase one unit of the base currency.  

• The exchange rates constantly changes because of supply and demand, and macroeconomic factors such as inflation, geopolitical events, and interest rates.  

What are exchange rates? 

• An exchange rate refers to the price of one currency that is expressed in terms of another currency. The exchange rate shows how much money one nation needs to buy another. For instance, if the EUR/USD exchange rate is 1.07, it means that 1 euro is equal to 1.07 US dollars. Exchange rates create the foundation of all foreign exchange transactions.  

Factors impacting exchange rates 

Inflation rates  

• Countries that have a relatively lower rate of inflation usually experience an appreciation in their currency value, as their purchasing power also increases when compared to countries with higher inflation.  

Political stability and economic performance  

• Countries that have stable governments and robust economies are seen as safer for investors, which increases the demand for their currency. Instability or even uncertainty usually causes depreciation of the currency value.  

Interest rate differentials 

• If a country has higher interest rates, it will attract foreign investment, which will increase the demand for that currency and cause it to be appreciated. Central bank policies of several currencies are now adjusting their rates to have a direct effect on exchange rates.  

Speculation and market sentiment  

• Speculation of a currency pair is often triggered by an appreciation or depreciation of currency. This creates short-term fluctuations. If investors believe that the value of a currency will increase, then they purchase more of it, which increases its value and vice versa.  

Public or government debt  

• If there are large amounts of public debt, then it will deter foreign investment or increase concerns over the ability of a country to repay, leading to the depreciation of the currency value. Furthermore, high debt also increases the inflation risk by increasing the supply of money.  

How currency pairs are traded in the forex market  

• Currency pairs in the forex market are traded by simultaneously purchasing one currency and selling another, on the basis of the expectation of how the value between the two currencies will change. While trading is conducted electronically through the brokers, with transactions being executed over the counter 24 hours a day, and five days a week.  

• Currencies are usually traded in pairs such as EUR/USD, USD/JPY, with the first currency designated as the base, and the second is considered the quote currency.  

• When you purchase a pair (go long), you buy the base currency and sell the quote currency, expecting that the base to rise in value. When you sell a pair (go short), you then sell the base currency and purchase the quote, expecting that the base to fall. Prices of the currency pair are quoted with a bid (buy) and ask (sell) spread set by the brokers. The bid refers to the buying price of the base, while the ask is the broker’s selling price.   

• Forex brokers usually provide leverage, which further allows traders to easily control the larger positions by using a small initial margin. This further amplifies both gains and losses. Forex trading is done by special electronic trading platforms like MetaTrader 4/5, which provide real-time price feeds, tools, and charts, so that you can predict what will happen to a currency pair next.  

• Trades are done in standardized lots, and a standard lot equals 100,000 units of the base currency, though mini as well as micro lots are also available. The traders then predict the price movements or hedge currency risk for international transactions as well as investments.  

• Currency pairs form the backbone of forex trading, as all purchase or sell positions in the forex market consist of two currencies at once. By trading currencies, participants predict the relative strength of one economy versus another, based on the absolute value of a currency.  

The role of exchange rate systems 

• Exchange rate systems play an important role in the global economy by predicting how the value of a country’s currency is set relative to the value of other currencies. The role of the exchange rate system creates a significant impact on international trade, economic stability, policy flexibility, and investment.  

Stability and predictability  

• Fixed or pegged rate systems offer predictable currency values by anchoring one currency to another currency or a basket of currencies. This stability further reduces the uncertainty that businesses face in long-term international contracts as well as trade, which builds confidence and investment.  

Foreign investment  

• A stable exchange rate system attracts more foreign direct investment (FDI) as it decreases the risks linked to immediate currency fluctuations. Fixed systems also provide more stability, while floating systems appeal to those investors who are willing to take currency risk for the potential gains.  

Trade balance influence  

• In the floating exchange rate systems, currency values often change on the basis of market focus, which further helps to correct any imbalances in trade by making exports cheaper or more expensive. Fixed systems usually maintain stability in currency change but often require intervention to prevent any imbalances.  

Conclusion  

• On coming to the conclusion, having a strong understanding of forex market basics, including currency pairs, exchange rates, and the factors impacting them, is significant for anyone wanting to succeed in forex trading. The forex market provides vast opportunities that come with inherent risks, and by mastering these main principles, you can easily navigate the forex market.  

• However, using a reliable platform such as Thaurus makes all the difference in your trading journey. The platform provides real-time market data and advanced tools that simplify the trading process.  
• Contact us, and our team will get back to you within 24 hours.