Forex trading takes place in the forex exchange market which is a place for buying and selling foreign currencies. It happens to be the world’s largest trading market where the value of currencies constantly fluctuates based on demand and supply.
Speaking of forex trading, it can be of many types. For example: spread trading, day trading, swing trading, scalping, and others. Traders decide on different forex trades depending on the market trends and movements.
The finance market is an attractive place for many. But to become a successful trader takes a lot. As a newcomer, you need to first learn the basics and understand how the market works. Without proper knowledge, it’s not possible to survive in the forex market.
If you are planning to enter the finance market, this guide is for you. This article will introduce you to the basics of forex trading.
What is forex trading?
In simple words, forex trading is the buying and selling of foreign currencies. A trader sells one currency and buys another depending on the value of the currency. It’s a global marketplace that stays open 24 hours a day for five days a week, i.e. Monday through Friday.
All currencies are traded in pairs in major financial centers of the world such as New York, London, Hong Kong, Frankfurt, Zurich, Sydney, Paris, Singapore, and Tokyo. This means it covers every time zone. It begins in Hong Kong and Tokyo and ends in the U.S.
The forex market is highly active and conducts trading electronically over the counter (OTC). Instead of one centralized location, all the transactions occur via computer networks worldwide.
How does the forex market work?
The foreign exchange market operates continuously and without interruption. In the past, major banks and institutional firms dominated the market, carrying out transactions on behalf of their clients. However, in recent years, the FX market has become increasingly accessible to retail investors and traders of various scales.
The global forex market lacks physical buildings or trading venues. Instead, it relies on a network of interconnected computer networks and trading terminals. Participants in this market include commercial banks, investment banks, institutions, and retail investors from different parts of the globe.
Initially, currency trading was a difficult thing for individual investors until it moved to the digital platform. Most forex traders were large hedge funds, multinational corporations, and high-net-worth individuals (HNWIs) as it required a lot of capital.
While investment and commercial banks continue to dominate the majority of forex trading on behalf of their clients, there are also opportunities available for individuals and professional investors to engage in currency trading.
How currencies are traded?
All currencies are assigned a three-letter code. With over 170 currencies in existence, the U.S. dollar (USD) holds a significant role in forex trading, followed by the euro (EUR) in the second position. It is a widely accepted currency in 19 European Union countries.
Other prominent currencies include the British pound (GBP), the Japanese yen (JPY), the Canadian dollar (CAD), the Australian dollar (AUD), the New Zealand dollar (NZD), and the Swiss franc (CHF).
Forex trading represents the exchange of two currencies, expressed as currency pairs. The major currency pairs constitute approximately 75% of trading volume in the forex market.
- EUR/USD
- USD/CAD
- USD/CHF
- NZD/USD
- USD/JPY
- GBP/USD
- AUD/USD
Three Ways To Trade Forex
Forex trading is not just meant for exchanging currencies but is also needed for speculating the future price movements of currencies. Like stock traders, forex traders aim to purchase currencies they believe will rise in value compared to other currencies, or sell currencies expected to drop in value.
The three main ways to trade forex are:
- The spot market
This primary forex market facilitates the immediate exchange of currency pairs, with exchange rates determined in real time based on demand and supply.
- The forward market
Rather than executing an immediate trade, forex traders can enter into a binding contract with another trader, fixing an exchange rate for a specified amount of currency on a future date. This arrangement is conducted privately.
- The futures market
Similarly, traders can opt for standardized contracts to sell or buy a specified quantity of currency at a predefined exchange rate on a future date. This market operates on an exchange, not privately.
The futures and forward markets are mainly used by traders seeking to hedge against future price changes in a currency. The exchange rates in these markets are influenced by developments in the spot market, which represents the largest forex market and handles the majority of forex trades.
Final Words
The world of forex is an exciting place for forex traders. The constant rise and drop of currency prices are likely to keep you on your toes. In the beginning, forex trading might feel difficult. But as you get the hang of things, the situation will slowly get better.
