In very simple words, the exchange of currencies in a global market is Forex trading. Forex trading is also known as foreign exchange market, currency market or FX. It is a huge trading volume and is dispersed geographically around the world. It operates continuously for 24 hours every day except for weekends. It has an average of $5trillion trading every single day and is the most active trading market all over the world.
Forex is a huge trading volume and includes all types and aspects of selling, buying, exchanging different currencies at any determined or even at a current price.
Large international banks are the main participants for Forex trading. Except for weekends, many different types of buyers and sellers are the anchors of trading around the world. Forex trading also represents the largest asset class around the world and has low margins of profit when compared to other fixed incomes of the market and people also trade forex on different portals like Ever Forex.
If you are new to forex trading and want to know how it works and what it is, then you are absolutely at the right place!
WHAT IS FOREX TRADING?
As I explained above, forex trading is also known as foreign exchange or currency market. Forex trading has multiple buyers and sellers from around the world who transfer currency at a specific quoted price that could be the current price and could be the settled price. This is a way for many large banks, companies, and individuals to convert or transfer currency with each other.
Forex transactions are also made if you travel out of your country. A lot of buyers and sellers use forex exchange for practical use: for example banks, but many users convert currencies intending to gain profit.
Currencies are very important to most people as foreign trade and businesses are to be done with the use of it. Every day, the amount of currency that is converted can make price movements volatile. Volatility not only increases the high-profit factor but also increases the high-risk factor but attracts many traders to come and buy/sell currencies. As I have also stated above that this market has a trading volume exceeding $5trillion each day.
Forex trading is very important and is a major need. If you are living in one country and need to buy something from another country, the importer has to exchange the currency and then pay the seller.
HISTORY OF FOREX TRADING
Forex market is a very new market where buyers and sellers convert their currencies for their advantages. Forex trading market is a modern market and invention and has been around since nations began converting currencies.
In 1971, after the accord at Bretton, many more different currencies got allowed. The value of many major currencies vary and that is why foreign exchange became a necessity. Forex trading is a huge advantage for individual’s profits and also allows banks and commercial investors to trade on behalf of their customers and clients. Forex trading is relatively new, unlike the stock market.
HOW DOES IT WORK?
Forex trading happens directly between two parties in an OTC (over-the-counter) market. The market is run 24 hours a day as there is no central location and the major trading centers for forex trading happens to have different time zones like Tokyo, London, Sydney and New york.
The global network of banks runs the forex trading market. Many different traders take advantage of the price movement and do not plan to take any delivery and exchange rate predictions instead. Following are some different types of market:
- Spot forex market
The spot market is like an on-the-spot kind of physical exchange. In a spot forex market, the currency pair is physically exchanged between the two parties and the exchange happens at the place or spot at the same spot where the trade is settled within a very short period.
- Forward forex market
A forward forex market is a contract where two parties agree to sell or buy a particular amount of currency, the price is also set. The date for this contract is set to be in the future or a range of future dates are set.
- Future forex market
A future forex market is also a legally binding contract. In this contract, both parties agree to buy or sell a certain amount of currency with a set price in the future. The date for this contract is also set.
BASE AND QUOTE CURRENCY
In a forex pair, the first listed currency is the base currency and the second listed currency is the quote currency. As forex trading is selling and buying currency instead of each other, so this is quoted in pairs. The price of this pair depends on the worth of one unit of the base currency. A three-letter code is used in listing the pairs, in which the two-letter stands for the currency and the other stands for the region. Buying great British pound and selling the US dollar is paired as GBP/USB. Following are the categories that most traders split their pairs in:
- Major pairs
This pair includes seven different currencies and those currencies make up to almost 80% of the global foreign trading. This pairing includes GBP/USB, USD/CHF, USD/JPY, EUR/UDB, etc
- Minor pairs
This pair is usually very less traded frequently. Instead of the US dollar, these feature many major currencies against one another. This pair includes GBP/JPY, EUR/CHF, EUR/GBP
This pair includes one currency from a small or emerging economy against a major currency. This pair includes EUR/CZK, GBP/MXN, USD/PLN
- Regional pairs
This pair includes all the pairs that are classified by regions like Australasia or Scandinavia. Some examples of this pair are AUD/NZD, AUD/SGD, EUR/NOK
PIP AND MARGIN
In forex pairs, the units that are being used to measure movement are called pips. One digit movement in the fourth decimal place is usually equal to a forex pip in a currency pair. So if the fourth decimal moves one place then it is called a single pip. After a pip, the decimal places are called pipettes or sometimes fractional pips.
In leveraged trading, the margin is the main key part. The initial deposit you put up to maintain and open a position that is leveraged, the margin is the term that describes it. The margin requirement change with your broker when you are trading in a forex market. The full percentage of a full position is called a margin.
FACTORS THAT MOVE THE FOREX MARKET
The forex market is a global market and it includes different currencies from all around the world so predicting becomes very difficult. Forex market is usually moved by the demand and supply chain but the following may be some factors that can move the forex market:
- Central banks
- News reports
- Market sentiment
In today’s foreign exchange market, trading currency is fairly easy. The basic three types of accounts for the retail investor are mini lots, standard lots and micro-lots. These three can make a beginner get started very easily and for as little as $50 only. The forex market is growing is the largest asset class in the world. The forex market operates 24 hours a day except for weekends. The profit is high as compared to fixed income jobs. The risk of profit and loss is great and you need to be familiar with the market so before jumping the start, we hope this helped you with the basic understanding of trading in a forex trading market!