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The Forex Market Explained

Learn about forex and over-the-counter trading

The currency trading market is worth 4 trillion on a daily basis, making it the largest and more transparent market in the world. Based on a bid-ask system, the forex market it's an over-the-counter (OTC) trade, meaning that brokers and dealers negotiate directly via a certain network. Keep reading to learn more about the forex trading market.

The market for OTC it’s the best way for individuals or entities to become involved in the trading foreign exchange, in other words, the OTC trades is their doorway to emerging markets. Together with this, there are some concepts that need to be borne in mind for operating the forex market trading at the lowest possible expense; not only you have to adhere to some regulations; you also have to keep track of your currency pairs, commissions, spreads, and so on.

Explaining the forex market
The forex market is a huge currencies market, where the trades are done 'over-the-counter' between forex brokers and forex dealers on a daily basis.  (Image by Pixabay.com)

Bid and Ask Price

The Holy Grail of investors is the bid-ask price system. The bid (or demand price) is the amount of money that the trader is willing to pay for a given share, while the ask (or offer price) is the amount of money an investor is willing to take for it. Given that the ask is necessarily a little higher than the bid, and not without reason, the difference between those prices is known as the bid–ask spread.

Commissions and Spreads

The profit of the broker comes from commissions and spreads. As described above, the spread is the difference between the bid and ask prices, whereas the commission is a percentage of that spread charged by the broker in return for advice. This service is important because it helps you gain a better comprehension of your first steps, the best technical decisions to make, and to avoid trading more than necessary.

Imagine that a EUR/USD quote of 1.273 - 1.275 has a two-pip spread fixed (a pip is the minimum unit of price change). This means that when someone buys at 1.275, you will be losing position by two pips. The only way you can make money is by moving at least three pips ahead. Trading with high spreads would be difficult using Forex 1 minute scalping strategy or something similar.

Keep in mind that the spreads can be either a fixed spread or a flexible spread, so wider spreads comes with greater volatility and greater losses as well. For this reason, the trading pairs with narrower spreads (between one and two pips) such as U.S. Dollar/Japanese Yen (USD/JPY), Euro/U.S. Dollar (EUR/USD), British Pound/U.S. Dollar (GBP/USD), and U.S. Dollar/Swiss Franc (USD/CHF) are among the most popular.

Conclusion

As the forex market counters to the relative value of currencies, you must ensure that the bid and ask prices actually play to your advantage. When used accurately, certain trading techniques can lead you to operate within the highest margin of liquidity and reach the highest profit margin. Finally, there are actually a huge and almost overwhelming number of forex brokers available, but it is advisable to look for a broker with a good reputation who guarantees that you can count on trading pairs with the tighter spreads.

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