What is Forex Trading | How does Forex Trading Work

WHAT IS 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 how individuals, small and large companies, commercial and central banks convert one currency into another.

if you have ever traveled to another country, then it is likely you have made a forex transaction.

While the broad majority of currency conversion is accepted to earn 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.

Forex Trading

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 centers 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 and Forex Trading.

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.

Who Trade Forex and Why

What is base and quote currency in Forex Trading?

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 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 favors being 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 1.2956, then one euro is worth 1.2956 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).

 

What move the Forex Market with Forex Trading?

The forex market is made up of currencies from all over the world.

which can make the exchange rate forecast difficult as many elements 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.

Central banks control 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.

NEWS REPORTS Forex Trading.

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.

WHAT MOVE THE FOREX MARKET

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

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 a lead in a certain direction, they will trade accordingly and may convince others to follow the action, increasing or decreasing demand.

ECONOMIC DATA

Economic data is essential to the price movements of currencies for two reasons.

It indicates how an economy is performing, and it offers awareness into what its central bank might do next.

For example, 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 sees a rise in price.

CREDIT RATINGS

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 a 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.

About Muhammad Shahid

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