Have you ever invested in a foreign currency? Do you know what Forex trading is? In this post, we will answer all such questions related to Forex trading and the Forex market.
Most of you have heard about the Forex market, but only a handful of you know what it is all about or how it works. Well, no worries, we have got you covered. This guide is targeted at people who want to learn about Forex trading and how the currency market works.
Forex is the shortened version of Foreign Exchange. It is the largest money market in the world. Forex trading is all about the sale of currencies around the world. The daily trading volume is estimated at over 5 trillion dollars. It is a globally operated market that remains open 24 hours a day from Monday to Friday. To know more about the same, give this article a read.
Also read: Decrypting Economic Calendars for Use When Trading
What is Forex Trading?
Forex trading can be defined as a network of sellers and buyers who exchange currency between each other at an agreed price. Forex Exchange is performed by companies, central banks, and even individuals. They make Forex trading happen by converting one currency into another.
If you have ever traveled outside the country, then you have made a Forex transaction.
Just so you know, a lot of foreign exchange is carried out for practical purposes. The majority of currency conversion is done to generate profit. Every day, trillions of dollars are converted, leading to price movements of some extremely volatile currencies. The Forex depends on this volatility. It gives traders the chance to earn greater profits. But at the same time, it also increases the risk involved.
The majority of Forex trade activities occur between fund managers, banks, and multinational corporations. These traders don’t usually take possession of the currencies themselves. Instead, they just speculate or hedge against future exchange rate fluctuations.
Let’s say a Forex trader wants to buy US dollars and sell euros if he believes that the dollar will increase in value. If that happens, then he will be able to buy more euros in the future. Meanwhile, an American company with operations in Europe could use the currency market as a hedge which would cause the value of the euro to fall. This means the value of their income earned will decrease.
What is the Forex Market?
In simple words, the Forex market is a decentralized global market where the trading of currencies occurs. This market determines foreign exchange rates for all currencies in the world. It includes buying, selling, and exchanging currencies at current value or prices.
Anyone who has traveled abroad has made a Forex transaction. In case you didn’t realize it, you know it now. Whenever you go to a different country, you need to convert your currency into their currency. For example, if you are flying to France, you need to convert your pounds into euros. When you convert your currency, the exchange rate between the two currencies determines how many euros you will get for your pounds. The Forex exchange rate fluctuates continuously. In other words, it is never stable.
The fascinating thing about the Forex market is that the value of a currency can change within minutes. Sometimes small changes may not appear to be a big deal for you. But on a bigger scale, it does make a huge difference. Let’s say a large international company needs to pay its overseas employees. In this case, even a small change quickly adds up.
Whether you are a business owner or a traveler, you would want to hold your money until the exchange rate is more favorable. However, there is a huge difference between buying/selling Forex and swapping currencies abroad.
In the Forex market, you can trade currencies any time and from any place you want. The market stays open 24 hours a day for five days a week.
Participating in the Forex market is the most efficient way of exchanging foreign currencies. It doesn’t require you to stand in line and pay undue premiums to trade monies. Instead, all you need is a computer and internet connection to contact an FX broker and engage in the world of the Forex market.
Different Types of Forex Markets
The Forex market can be of three different types. The details of each of the Forex markets are given below.
1. Forex Spot Market
This refers to the physical exchange of the currency pair, the exact moment the operation is settled or after a short period.
2. Forex Forward Market
A contract is made to buy or sell a fixed currency amount at a certain price. The expiration of the currency is made on a future date.
3. Forex Futures Market
This is similar to the Forex forward market. A contract is created to buy or sell a certain currency amount at a decided price on a future date. But unlike a forward market, a futures contract is legally binding.
Although there are different ways to trade Forex, they all work the same way. They all include buying one currency and selling another simultaneously. For those who don’t have an idea, Forex trades are carried out through Forex brokers. However, this is a traditional style of Forex trading. With the emergence of online platforms, you can perform online trading. This is a more convenient way of trading as you can invest from any place and time you want.
How Do Forex Markets Work?
Like commodities or shares, Forex trading does not occur on exchanges. Instead, it directly takes place between two parties in an over-the-counter market.
As already mentioned before, the Forex market is run globally by a network of banks, companies, and individuals. They are spread across four main Forex trading centers that are located in different time zones. This includes New York, London, Tokyo, and Sydney. Since there is no central location, the Forex market remains open 24 hours a day.
On the Forex market, trading is done in an electronic format. Traders across the world buy and sell currency pairs 24 hours a day, 5 days a week. Due to online trading, participants can engage in Forex trading remotely.
When a trader sends an order for buying or selling to the Forex market, brokers carry out the transaction by extending the margin. Traders are responsible for opening new positions far in excess. They do so to generate profit from favorable fluctuations in price. To complete each trade, the market’s infrastructure matches contradictory orders from individual traders, market makers, and other liquidity providers.
All Forex trades include two currencies or a pair of currencies. That’s because you are betting on the value of a currency against another. Just so you know, EUR/USD is the two most traded currency pairs in the world.
EUR is considered to be the first currency in the pair. In other words, it is the base, while the USD is the second currency and the counter. When you see a quoted price, that price helps you to know how much one euro is worth in US dollars.
There are always two prices as one is the selling price and the other is the buying price. The difference between the two prices is called the spread. When you sell or buy, you are dealing with the first currency in the pair.
For example, you think that the value of the euro will increase against the US dollar. The currency pair is EUR/USD, where the euro is the first currency. You believe that the euro will go up, so you buy EUR/USD. But if you think that the value of the euro will decrease against the US dollar, in this case, you will sell EUR/USD.
Trading currency pairs in the forex market are user-friendly and straightforward. You will find a lot of functionalities available on the trading platform. It is designed for trade execution and analysis. Some of the advanced features worth mentioning include technical indicators, charting applications, and multiple order types. Whether you are a long-term investor or an intraday scalper modern, a trading platform makes it easier to conduct trade in the forex market.
The forex market has currencies of all the countries. But the seven main currency pairs include:
- EUR/USD
- AUD/USD
- USD/CAD
- USD/JPY
- GBP/USD
- USD/CHF
- NZD/USD
These are called the major currency pairs in the Forex market. They occupy 75% of the trade in the Forex marketplace.
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Forex trading can be both profitable and risky. If you are willing to take the risk, you are ready to be a part of the Forex market. But before you enter the marketplace, you must acquire knowledge about Forex trading. Without sufficient knowledge of Forex trading, you will find it extremely difficult to handle things. Most importantly, you won’t be able to make the right decisions. For a newbie, the Forex exchange market may appear to be a scary place. But with time and experience, you will get the hang of things.
