The word forex, which has entered the literature as an abbreviation for foreign exchange, essentially refers to the conversion of currencies between two countries, i.e. convertibility. It is often further abbreviated as "fx." The foreign exchange market (fx market) has become more and more reputable over the years as it offers many opportunities to its investors. Over time, various commodities, indices, and stock CFDs have been added to the range of products traded on forex platforms.
In terms of trading volume and liquidity, forex is the largest market in the world. The leverage system, which allows traders to open large trades with small capital, has paved the way for the forex market to grow so much.
There are tens of thousands of banks and brokerage houses that handle forex transactions worldwide. Although the basic functioning is the same, market rules may vary according to the regulations in the country.
Trading in goods, foreign exchange precious metals, or the barter economy, is almost as old as human history. The world financial system went through many different phases before it took its current form. Before the Second World War, the Gold Standard System prevailed, followed by the Bretton Woods decisions that established a financial system indexed to the US Dollar. After 1971, the free exchange rate regime was adopted.
After 1990, the use of computers and the development of technological facilities encouraged banks to establish their own trading platforms. Thanks to these trading platforms, which banks first established, customers were able to instantly access price movements and carry out trading transactions on their own.
As trading platforms and the technology enabling forex trading became accessible to almost everyone, interest in financial markets increased drastically. While in the past only banks and large capital investment funds could carry out such transactions, today almost anyone can open an account with a brokerage firm and become an individual investor.
It is a global, decentralized over-the-counter financial market where all forex products, including gold, and oil, are traded. The forex market is similar to the stocks and Futures and Options Market (F&O) in some respects, but many features make forex different from the others.
Along with individual traders, there are other participants in current trading such as:
The world of economy is built on a supply and demand relationship for every currency and every financial product, and this is the main factor that determines the price. Banks, which are at the heart of the financial system, carry out large volumes of transactions in order to meet the needs of their customers and to transform the financial assets accumulated in their hands into a number of other financial products. To summarize, we can say that prices in the market emerge through banks as a result of the balance of supply and demand. We can also say that banks often act as market makers (MM - market makers) in forex markets.
After prices are generated by international banks, they are transmitted to brokerage houses operating around the world through a number of price networks. Some of these forex price networks are well-known organizations such as Reuters, Bloomberg, and Currenex. Brokerage houses add their own earnings, called markups, to the prices from these networks. This results in the final prices that traders see on their screens.
When you want to buy a quantity of foreign currency from any exchange office, the transaction takes place at the selling price of this institution. When you want to sell, the buying price of the exchange office is taken as a basis. This is how the forex market works. The conversion between forex pairs takes place by buying and selling base and opposite currency pairs calculated on the instant parity. As a result, it is actually the counter currency that determines the value of the base currency.
Traders in the forex markets buy and sell their expectations about the value of the base or counter currency. So, every forex transaction is actually speculation on a micro scale.
The forex market is a decentralized financial market that can offer high return opportunities to its traders, but it also carries considerable risks. The logic of forex trading is based on profiting from the price relationship between two currencies or any two financial products. Forex trades can be opened with both bearish and bullish expectations.
Here are some of the most important terms in forex:
In its simplest definition, parity is the ratio of a country's currencies to each other. Parities are of great importance not only for forex trading but for all economic activities in a country. International trade takes place using a large number of different currencies, mainly USD and EUR.
For example, if the EURUSD pair is at 1.12, this means that 1.12 USD can be bought for 1 Euro.
A forex pair refers to the base and counter instruments of a product traded on the forex market. If we take the EUR/USD pair, the first currency in the first row, the EURO, is the base currency. The second currency, the US Dollar, is the counter currency.
A forex pair represents how many units of the counter currency in the second row are equivalent to one unit of the base currency in the first row.
When trading on the forex markets, forex pairs can be bought and sold in specific quantities called "lots". Opening a lot trade usually means 100,000 units of the base currency in a forex pair. So, a 1 lot trade on the EURUSD pair would be worth 100,000 Euros. It is also possible to trade lower amounts. These volumes are called micro lots, nano lots, etc.
Pip, short for Price Interest Point or Point in Percentage, is the expression in units of the smallest price movement in pairs traded in forex. The upward or downward price movements in all investment instruments in the forex markets are expressed in pips. Many forex pairs are denoted with 5 digits after the comma, so 1 pip is usually worth one ten-thousandth of a currency.
Leverage is a system in the forex markets that allows traders to open trades with higher amounts than the capital they have.
The use of leverage in the forex markets has actually resulted in forex becoming so popular around the world. Because for investors with a high risk appetite, there is the possibility of achieving large returns with small numbers.
Hedging is when an investor opens a transaction in the opposite direction of its position in a foreign currency, commodity, or any other financial asset in order to hedge against future financial risk.
Institutional or individual investors trading in the forex markets often engage in hedging in parallel with the evolving conditions in the markets and in this way, they try to at least limit their possible financial losses.
Hedging can be used not only by investors trading in financial markets but also by institutions and businesses that have to conduct any commercial activity in foreign currency. For example, a company that buys goods from abroad and has to pay USD for several years in return may prefer to open a reverse transaction to hedge itself against the risk of an astronomical increase in the USD exchange rate.
You can see the forex products you can trade with zForex below. We offer brokerage services to our investors in the forex market with our wide range of products ranging from currency pairs to commodity products, from foreign stock CFDs to international stock indices, all with competitive spread rates.
The most traded currencies in the forex markets are the US Dollar, Euro, Japanese Yen, and Pound. The pairs formed by these currencies such as EURUSD, USDJPY, GBPUSD, and EURJPY also stand out as the most traded forex products.
| Forex Major | Forex Minor | Forex Exotics | Commodities | CFDs | Crypto |
| AUDUSD | AUDCHF | EURNOK | XAUUSD | NATGAS | BCHUSD |
| EURUSD | AUDNZD | EURPLN | XAGUSD | US30 | BTCUSD |
| GBPUSD | CADCHF | EURSEK | XAGEUR | US100 | ETHUSD |
| USDCAD | CADJPY | EURTRY | XPTUSD | XRPUSD | |
| USDCHF | CHFJPY | EURZAR | XPDUSD | LTCUSD | |
| USDJPY | EURAUD | GBPDKK | XAUEUR | ||
| EURCAD | GBPNOK | ||||
| EURCHF | GBPSEK | ||||
| EURGBP | GBPSGD | ||||
| EURJPY | GBPTRY | ||||
| EURNZD | NOKSEK | ||||
| GBPAUD | USDCNH | ||||
| GBPCAD | USDCZK | ||||
| GBPCHF | USDDKK | ||||
| GBPJPY | USDHUF | ||||
| GBPNZD | USDMXN | ||||
| NZDCAD | USDNOK | ||||
| NZDCHF | USDPLN | ||||
| NZDJPY | USDSEK | ||||
| NZDUSD | USDTRY | ||||
| USDSGD | USDZAR | ||||
| EURSGD | |||||
| CHFSGD | |||||
| NOKJPY | |||||
| SEKJPY |
According to BIS (Bank of International Settlement) data, it is known that the daily trading volume in forex markets is 5.5 trillion dollars. International banks such as Deutsche Bank, Citibank, Barclays, J.P Morgan, and other international finance companies account for a large part of this huge trading volume. These companies are also the biggest liquidity providers in the forex market. Deutsche Bank has the largest share with a trading volume of around 20%.
The forex market provides advantages to its investors with a number of unique features.
The advantages of the forex market can turn into disadvantages for investors who do not have sufficient trading experience and market knowledge. Specifically, the use of high leverage and misunderstandings about how different order types work can result in rapid financial losses.
Forex trading involves high risks as well as the opportunity for high returns. Forex risks can be classified under these points:
Arbitrage is a method of earning returns without taking risks by taking advantage of the difference between the instantaneous bid and ask prices of securities traded in different markets at the same time. In other words, you buy the same product in one market at a lower price and immediately sell it in another market at a higher price and earn a positive return.
There are many securities traded on both forex and the stock exchange. There is no red line between those who are interested in the forex market and those who trade stocks on stock exchanges. There are many investors who want to take advantage of the opportunities in both markets at the same time.
Forex markets are distinct from other markets due to several unique features. It is highly advised to learn about these similarities or differences between forex and other financial markets before opening a trade.
| Forex Market | Stock Market |
| The forex market is decentralized, not managed from one place. Forex is an unorganized, independent over-the-counter financial market. Pairs may vary slightly between brokerage houses. | Exchanges, on the other hand, are organized financial markets that are centrally managed and supervised. The stock exchanges of countries are run by the official institutions of that country. Brokerage houses cannot price products differently |
| In the forex market, you don't own the products you buy and sell. In forex, you speculate on the price and try to make a profit in this way | Some of the products traded on stock exchanges can also be physically owned. Stocks, for example, are valuable instruments that document your investment. |
| Due to its very high liquidity, forex markets are almost impossible to manipulate. | Especially stocks traded on local exchanges can be manipulated by investors with large capitalization. |
| The forex market is open for trading 24 hours a day, 5 days a week. This feature provides more opportunities. | Stock exchanges are financial markets with more limited session hours. They are usually open for trading for 8 hours. |
| The most important feature that distinguishes the forex market from the stock market is the leverage factor. Leveraged transactions allow you to open much larger positions compared to your capital. | There is no leverage in stocks, bonds, and many other products traded on the stock exchange. You can invest up to the amount of your collateral. |
| There are no commissions in forex trading. The difference between the bid and ask price is called the spread. Overnight interest (swap) can be applied at varying rates for open positions in forex. | When trading on the stock exchange, brokerage firms usually charge a commission to investors. However, overnight interest (swap) as in forex does not apply to investments such as stocks. |
| Forex is not an organized financial market. It is decentralized. Prices are set by brokerage firms and may vary. | F&O (futures and options exchange) is also an organized financial market. The prices of products are set centrally, so there is a single price. |
| Hundreds of local and international currencies, precious metals, stock indices, commodities, and CFDs on companies' stocks can be traded on the forex market. | Futures and options contracts are traded on a range of stocks and indices, including the ASX index. |
Is the forex market reliable? Questions such as whether it is safe to invest in forex have been voiced by investors who have been interested in this market for years. As long as you trade through a regulated brokerage firm, the forex market is reliable.
As a high-risk financial market, forex has seen many beginners lose money. Naturally, this has resulted in a negative perception of the forex market.
The popularity of the forex market has led to the emergence of a number of fraudulent companies. These companies often develop campaigns that attract investors and promise rewards. After collecting a certain amount of collateral, such companies, which seem advantageous at first, may close the system completely and defraud investors. It is necessary to be careful against fraud cases in forex markets.
Forex fraud is carried out by offshore companies that are not licensed and are essentially set up for the purpose of defrauding people. These companies are able to influence investors with a number of opportunities that cannot be provided by authorized and licensed brokerage firms. Offers such as deposit bonuses, reference bonuses, tax-free forex can attract the attention of forex traders.
In order to trade in the forex market, you need to open an investment account. The presence of a number of features in the brokerage firm you choose will reflect positively on you during your journey in the market. You can use many criteria when choosing a brokerage firm. These criteria include:
In the forex market, brokerage houses do not charge commissions on transactions, but expenses such as spreads and swaps arise during forex transactions.
In its simplest definition, a spread is the difference between the bid and ask price of a forex product. Since the liquidity in the forex market is very high, this difference corresponds to extremely small figures. Some brokerage firms may use fixed spreads, while others may use variable spreads.
A swap in forex refers to the carrying cost or interest amount associated with holding a position overnight. The swap fee is applied overnight, meaning you do not pay a swap for a position you open and close during the day.
Forex pairs, as mentioned earlier, have a base currency and a counter currency. Swap fees are always calculated on the opposite pair.
Long and short are used to describe the price movement of a financial asset in two possible directions.
A long position is opened by an investor who believes that the price will rise. It has found a place in our daily life with phrases such as long open, and going long. In summary, it refers to buying and a bullish outlook.
A short position is opened by an investor who anticipates that the price will fall. The term "going short" has become a common expression in our daily lives. It refers to the selling and bearish direction.
While the terms buy and sell are commonly used in stock markets and other spot transactions, they are replaced by long and short in the forex market.
The forex market can be a bit confusing, especially for beginner traders. Therefore, it would be useful to reinforce the topic with examples of long positions and short positions.
You expect that the value of the Euro (EUR) will rise against the US Dollar (USD). Therefore, you decide to go long on the EURUSD currency pair.
Steps:
Outcome:
If the EURUSD exchange rate rises to 1.1300, you could sell your 10,000 Euros and receive $11,300 (10,000 Euros * 1.1300).
Your profit would be $100 (selling proceeds - initial investment).
You expect that the British Pound (GBP) will weaken against the Japanese Yen (JPY). So you decide to go short on the GBPJPY currency pair.
Steps:
Outcome:
If the GBPJPY exchange rate falls to 145.00, you can buy back the 8,000 Pounds with 1,160,000 Japanese Yen (8,000 Pounds * 145.00).
Your profit would be 40,000 Japanese Yen (initial received amount - buyback cost).
It's important to note that forex trading involves risk, and market conditions can change rapidly. Traders often use risk management strategies, like setting stop-loss orders, to limit potential losses. These examples are simplified and do not account for transaction costs or other factors that can impact actual trading results.
To make successful trades in the forex markets, it is necessary to have a good grasp of the order types available on all forex platforms. A forex trade order is the trader's decision to buy or sell, which is reflected on the trading platform. Here is a list of orders traders can use in forex:
To learn more about order types in trading, read the article.
A margin call is a warning reminder made by brokerage firms to traders. A margin call occurs under the following conditions.
Receiving a margin call alert means that the collateral remaining in the trader's account after the loss incurs the risk of not being able to carry the 0 position. With a margin call, the trader is reminded that if he wants to keep his position open, he needs to deposit some more money.
Learning forex is something that almost every trader with an interest in financial markets aspires to. This is because forex is the most liquid financial market in the world and, thanks to the leverage factor, it contains investment products that offer the highest return opportunity.
We can divide the forex learning process into the following stages:
If you are new to forex, pay attention to some aspects before opening a position. Here is what you need to consider:
We offer MetaTrader, one of the most useful trading platforms in the forex market. You can also use it on your web browser which can give you easy access to your trading.
MetaTrader 5 is the leading platform of choice for millions of individual traders globally and the world's leading brokerage firms. You can download the MT5 application to your computer, and connect to your forex account and easily trade forex and CFDs.
You can also use the MetaTrader Web App if you are away from your device. This allows you to easily access MetaTrader, regardless of your location.
There are many trading strategies you can use when trading forex. Here are the most common trading strategies used by traders in forex markets:
Knowledge of technical analysis is very important in the forex market, and especially for traders who trade with high leverage. Entering trades with reference from multiple indicators can increase the success rate. Here are the main indicators you can use in forex technical analysis:
In our comprehensive review of what forex is, we have mentioned a thorough overview of the forex market, covering its definition, history, market features, participants, trading instruments, and various aspects of trading. We have also touched upon the advantages and disadvantages of forex trading along with the risks associated with trading. Hope this article can help fellow traders to learn forex and improve their practice.
Is forex limited to only foreign exchange transactions?
Forex transactions primarily focus on the exchange of one currency for another, but the market also includes derivatives and other financial instruments related to currency trading.
Who can trade on the forex markets?
Individual investors, companies with small or large capital, mutual funds, commercial banks, and even central banks can trade in the forex markets.
Is forex or the stock market better for investing?
The forex market, with its leverage feature, has the potential for higher returns in the short term. The stock market, on the other hand, is a market to be considered for the longer term.
Can I trade forex on a crypto exchange?
We see that forex transactions can also be made on some cryptocurrency exchanges. However, there are cases where some brokerage firms offer cryptocurrency platform services by opening subsidiary companies. Both scenarios involve serious risks for the investor. The lack of any supervision by official institutions on these platforms may expose investors to some fraud risks, so it is not advisable to conduct forex transactions on cryptocurrency exchanges.
Is forex legal?
Forex transactions are legal. Investors who trade in forex markets, opening positions on various currencies or international indices, in essence, do not violate any regulatory provisions.
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