What is forex trading, and how to start in Jordan

What is forex, and how does it work? In this guide, we will address both of these questions and more, showing beginners the ropes and guiding them through the basics of forex trading in Jordan.

What is forex?

Short for “Foreign Exchange” and also known simply as “FX”, the forex market is a global currency exchange market. It’s one of the most liquid markets in the world, with the equivalent of trillions of dinars traded every single day.

That’s the short definition. For a more detailed answer to the question of “What is forex?" read on.

Definition

Individuals, banks, and companies trade on the forex market, primarily to profit from price changes. All currencies are traded in pairs, and traders speculate that one pair will strengthen over another, such as speculating that JOD will increase in relation to USD.

How the forex market works

The forex market is open globally 24 hours a day, five days a week. Traders speculate on currency pairs and seek to profit from resulting changes. It’s a decentralized market, which means it’s not controlled by any specific organization. Instead, it is driven by the actions of its traders and influenced by supply and demand factors.

Trades occur electronically, and activity shifts across major global financial centers such as London, Tokyo, and New York due to the market opening/closing times in those regions.

Despite the lack of central control, forex brokers and financial institutions offering access to forex trading are still regulated. Rather than being controlled by a single authority, regulation for these entities falls to regional supervisory bodies such as the Jordan Securities Commission or JSC.

There are several major players in the forex market, and understanding the roles they play is key to truly understanding the question of “What is forex?”:

• Commercial banks: Banks are market makers and trade considerable sums of money in the forex market, often as a way to hedge exposure.
• Central banks and governments: Governments and their central banks, where applicable, use the forex market to stabilize currency rates.
• Brokers: Brokers buy/sell currencies on behalf of clients, often charging a commission to use their services.
• Hedge funds: Large hedge funds often use currencies to hedge exposure.
• Retail traders: If you’re an individual speculating on foreign currency movements—and as you’re reading an article on what is forex, we assume that’s the case—then you fall into this category.

What is forex trading?

We have discussed what forex is at a basic level and established how it works, who participates in the market, and how it’s controlled. But what is forex trading, how does it work, and what factors influence price movements?

Currency pairs and price movement

Forex trades revolve around currency pairs, such as EURUSD or JODUSD. You’re not buying a currency and hoping that its value increases in relation to everything else; you’re effectively buying one and selling another, speculating that the price of the former will increase compared to the latter. 

For example, if you think that EUR will strengthen against USD, you may buy EURUSD. This effectively means you are buying euros while selling US dollars. 

As with other major financial markets, values are determined by supply and demand. If more people are buying, the demand increases, and the price rises. If there is a sudden increase in selling activity, it indicates that fewer people want to hold that particular currency, and thus its value will drop.

Some of the factors that can influence currency values include:

• Changes in inflation—higher inflation usually reduces the value.
• Changes in interest rates—higher rates often increase the currency’s value.
• Public debt—greater public debt can mean higher inflation, which negatively impacts the currency.

A candlestick chart in the Exness Terminal showing EURUSD in a 1-minute timeframe.

Forex vs other financial markets

So, what is forex in relation to other financial markets, and how does it compare?

Well, while it is similar in the sense that it’s used to speculate on future price movements and can be influenced by various economic and political factors, there are some significant differences:

• Forex vs stocks: Currency prices move quickly, making them a much more volatile option than stock trading. They are also subject to more macroeconomic factors that impact supply and demand, while stock prices are driven by a company’s fundamentals, such as profits, dividends, and trends. The forex market is open 24/5, which provides traders with a more flexible option.
• Forex vs commodities: Commodities like gold, silver, oil, and agricultural products are also very volatile and influenced by similar factors as foreign currencies. However, they are also subject to major price swings resulting from production changes, weather conditions, trade disputes, and political instability, all of which can influence how much of a given commodity circulates in the marketplace.

As with other financial markets, forex traders often use leverage, which increases their exposure, thus increasing both their risk and potential profit. For instance, if they use 1:100 leverage on a  10 JOD trade, they are effectively trading as if they had 1,000 JOD. Leverage should be used very carefully by beginners, as small price swings are greatly amplified and can result in significant loss.