Explanation of forex trading?
Forex Trading or FX, can be defined as a medium of buyers and sellers.
who exchange currency between each other at a decided price.
It is the means by which individuals, small and large companies, commercial and central banks convert one currency into another.
if you have ever travelled another country, then it is likely you have made a forex transaction.
While a lot of foreign exchange is done for practical purposes, the broad majority of currency conversion is accepted with the aim of earning a profit.
The amount of currency converted every day can make price movements of some currencies especially volatile.
For this volatility that can make forex so attractive to buyers and sellers like traders: bringing about a greater chance of high profits, while also increasing the risk.
How Does Currency Market work?
Disparate stocks, bonds or commodities, forex trading does not take place on exchanges but directly between two parties, in an over-the-counter (OTC) market.
The forex market is run by a worldwide network of banks, spread across four major forex trading centres in different time zones.
London, New York, Sydney and Tokyo. Because there is no central location, you can trade forex 24 hours a day.
There are three different types of forex market:
1-Future forex market.
An agreement or promise (contract) is agreed to buy or sell a set amount of a given currency at a set price and date in the future.
Unlike forwards, a futures contract is legally unbreakable.
2-Forward forex market.
A promise (contract) is agreed to buy or sell a set amount of a currency at a specified price,
to be settled at a set date in the future or within a range of future dates
3-Spot forex market.
The physical exchange of a currency pair, which takes place at the exact point the trade is settled that is ‘on the spot’ or within a short period of time.
What is base and quote currency ?
The first currency listed in a forex pair is a base currency is and while the second currency is called the quote currency.
Forex trading always involves selling one currency in order to buy another.
that is why it is quoted in pairs the price of a forex pair is how much one unit of the base currency is worth in the quote currency.
Each currency in the pair is listed as a three-letter code, which favor to be formed of two letters that stand for the region.
And one standing for the currency itself.
Base and Quote currency
For example, EUR/USD is a currency pair that involves buying the euro and selling the US dollar.
EUR is the base currency and USD is the quote currency. If EUR/USD is trading at 1.1162, then one euro is worth 1.1162 dollars.
If the euro rises against the dollar, then a single euro will be worth more dollars and the pair’s price will increase, If it drops.
the pair’s price will decrease. So if you think that the base currency in a pair is likely to strengthen against the quote currency, you can buy the pair (going long).
If you think it will weaken, you can sell the pair (going short).
The most providers split pairs into the following categories:
- Major pairs.Seven currencies that make up 80% of worldwide forex trading. Includes USD/CHF, USD/CAD EUR/USD, USD/JPY, GBP/USD, and AUD/USD
- Minor pairs. Less frequently traded, these often feature major currencies against each other instead of the US dollar. Includes: EUR/GBP, EUR/CHF, GBP/JPY
What move the Forex Market ?
The forex market is made up of currencies from all over the world.
which can make exchange rate forecast difficult as there are many element that could contribute to price movements.
However, like most financial markets, forex is primarily driven by the forces of supply and demand, and it is important to get an understanding of the influences that drives price fluctuations here.
central banks controll Supply, who can report measures that will have a significant effect on their currency’s price.
Quantitative easing, for instance, involves injecting more money into an economy, and can cause its currency’s price to drop.
Commercial banks and other investors tend to want to put their capital into economies that have a strong outlook.
So, if a positive piece of news hits the markets about a certain region, it will encourage investment and increase demand for that region’s currency.
However there is a side by side increase in supply for the currency.
The imbalance between supply and demand will cause its price to increase.
Similarly, a piece of negative news can cause investment to decrease and lower a currency’s price.
This is why currencies tend to reflect the reported economic health of the region they represent.
Market sentiment, which is often in reaction to the news, can also play a major role in driving currency prices.
If traders believe that a currency is lead in a certain direction, they will trade accordingly and may convince others to follow action, increasing or decreasing demand.
Economic data is essential to the price movements of currencies for two reasons.
It gives an indication of how an economy is performing, and it offers awareness into what its central bank might do next.
For example, that inflation in the UK has risen above the 2% level that the Bank of England (BoE) aims to maintain.
The BoE’s main policy tool to act rising inflation is increasing pound interest rates.
So traders might start buying the Pound in anticipation of rates going up. With more traders wanting pound, GBP/USD see a rise in price.
Investors will try to increase the return they can get from a market, while decreasing their risk.
So beside interest rates and economic data, they might also look at credit ratings when deciding where to invest.
A country’s credit rating is a free assessment of its probability of repaying its debts.
A country with a high credit rating is seen as a safer area for investment than one with a low credit rating.
This often comes into specific focus when credit ratings are improved and lowered.
A country with an improved credit rating can see its currency increase in price, and vice versa.
How does Forex Trading work ?
There are a variation of different ways that you can trade forex, but they all work the same way.
By simultaneously buying one currency while selling another.
Habitually, a lot of forex transactions have been made via a forex broker, but with the rise of online trading you can take advantage of forex price movements using derivatives like CFD trading
CFDs are leveraged products, which enable you to open a position for a just a fraction of the full value of the trade.
Unlike non-leveraged products, you don’t take ownership of the asset, but take a position on whether you think the market will rise or fall in value.
Although leveraged products can magnify your profits, they can also magnify losses if the market moves against you.
What is the Spread in the Forex Trading ?
The spread is the difference between the buy and sell prices quoted for a forex pair.
Like many financial markets, when you open a forex position you’ll be presented with two prices. If you want to open a long position.
You trade at the buy price, which is slightly above the market price.
If you want to open a short position, you trade at the sell price, slightly below the market price.
What is Lot in Forex ?
We trade currencies in lots. Forex.
As forex tends to move in small amounts, lots tend to be very large: a standard lot is 100,000 units of the base currency.
So, because individual traders won’t necessarily have 100,000 pounds (or whichever currency they’re trading) to place on every trade, almost all forex trading is leveraged.
What is Leverage in Forex Trading
Leverage is the means of gaining exposure to large amounts of currency without having to pay the full value of your trade upfront.
Instead, you put down a small deposit, known as margin. When you close a leveraged position, your profit or loss is based on the full size of the trade.
While that does magnify your profits, it also brings the risk of amplified losses – including losses that can exceed your margin.
Leveraged trading therefore makes it extremely important to learn how to manage your risk.