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How Forex Trading Works

Forex trading is centered around currency pairs, such as EUR/USD (Euro/US Dollar) or USD/JPY (US Dollar/Japanese Yen). Each pair represents the value of one currency relative to another. For instance, if EUR/USD is quoted at 1.10, it means 1 Euro equals 1.10 US Dollars.

Currencies are classified into three main categories:

• Major pairs: The most traded pairs, such as EUR/USD, GBP/USD, and USD/JPY.
• Minor pairs: Less commonly traded but still significant, like EUR/GBP or AUD/JPY.
• Exotic pairs: Combinations of a major currency with one from an emerging market, such as USD/TRY (US Dollar/Turkish Lira).

Why Trade Forex?

• Profit Opportunities: Traders seek to profit from currency price fluctuations, whether the market is rising or falling.
• Diversification: Including forex in a portfolio helps reduce risks associated with other asset classes.
• Accessibility: Forex trading is available to both institutional and retail traders through online platforms and brokers.
• Hedging: Businesses and investors use forex to protect against adverse currency movements.

Key Concepts in Forex Trading

• Pip: The smallest price movement in a currency pair, typically 0.0001.
• Spread: The difference between the bid (buy) price and ask (sell) price.
• Leverage: Borrowed capital that allows traders to control larger positions, magnifying both potential gains and risks.
• Margin: The minimum capital required to open a leveraged position.
• Stop-Loss/Take-Profit Orders: Automated tools to limit potential losses or lock in profits.