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Forex, also known as
forex Trading or foreign exchange trading, is the conversion of one currency
into another.
It is considered one of
the most active traded markets in the world, with an average daily turnover of
$ 5 trillion.
Many investors are doing
Forex Trading to achieve many profits in a short period of time, such as making
profits from gold trading, oil trading, metals trading, Bitcoin trading,
banking, mortgages, and credit.
Take a close look at
everything you need to know about Forex, including the nature of forex, how it
is traded and how leverage works in Forex.
What is Forex Trading?
Forex or foreign
currencies can be defined as a network of buyers and sellers who transfer
currencies between them at an agreed price.
This is the method by
which individuals, companies, and central banks convert one currency into
another - if you have ever traveled abroad, it is likely that you have entered
into a forex transaction.
While a lot of foreign
currencies are converted for practical purposes, the vast majority of currency
conversions are made with the aim of making a profit. The number of currencies
converted daily can lead to significant volatility in the price movement of
some currencies.
It is this volatility
that makes the Forex market attractive to traders: it brings great
opportunities for great profits, and it also carries increased risks.
How do the forex markets
work?
Unlike stocks or
commodities, forex trading is not done on exchanges, rather it is done directly
between two parties in the OTC (OTC) market.
The forex market is
managed by a global network of banks spread over four major forex trading
centers in different time zones: London, New York, Sydney, and Tokyo.
Since there is no central
location, it is possible to trade forex 24 hours a day.
There are three different
types of forex markets:
Spot Forex Market:
It is the physical
exchange of a currency pair, which occurs at the point specified for settlement
of the trade - that is, immediately - or within a short period of time.
Forex Futures Market:
In which a contract is
agreed to buy or sell a certain amount of the currency at a specific price, to
settle it at a specific date in the future or within a set of future dates.
Forex Market:
In which a contract is
agreed to buy or sell a specified amount of a specific currency at a specified
price and a specific date in the future. Unlike futures contracts, futures
contracts are legally binding.
Most of the traders who
speculate on forex rates are not planning to receive the currency itself, instead
of making forecasts of exchange rates in order to take advantage of price
movements in the market.
What is the base
currency?
The base currency is the
first currency in the forex pair, while the second is called the quote
currency. Forex trading always involves selling one currency in order to buy
another, which is why they are listed in pairs - the price of the forex pair is
the value of one unit of the base currency in the quote currency.
Each currency in the pair
is listed as a three-letter symbol, the first two letters usually symbolizing
the region, and the third the currency itself. For example, GBP / USD is a
currency pair that involves buying the British pound and selling the US dollar.
To maintain order, most providers divide pairs into the following categories:
- Major pairs. Seven currencies makeup 80% of forex trading globally. These include: EUR / USD, USD / JPY, GBP / USD and USD / CHF.
- Secondary pairs. Less traded, and in which major currencies are traded against each other instead of the US dollar. These include: EUR / GBP, EUR / CHF, and GBP / JPY.
- Non-major or unfamiliar pairs. A major currency against one from a small or emerging economy. These include: USD / PLN, GBP / MXN, EUR / CZK.
- Regional or regional pairs. Pairs classified by region - such as Scandinavia or Australia. These include: EUR / NOK, AUD / NZD and AUS / SGD.
What moves the forex
markets?
The forex market consists
of currencies from all over the world, which makes it difficult to predict
exchange rates due to the presence of many factors that may contribute to price
movements. However, like most financial markets, forex is primarily affected by
the strength of supply and the strength of demand, and it is important here to
understand the influences that lead to price fluctuations.
Central banks
Supply is controlled by
central banks, which can announce measures that will significantly affect the
rate of their currency. Quantitative easing, for example, involves injecting
more money into the economy, and it may cause the price of its currency to
depreciate.
News reports
Commercial banks as well
as other investors tend to put their capital into economies with strong
expectations. Therefore, if positive news occurs in the markets about a
specific region, this will encourage investment and increase the demand for
that region’s currency.
Market trend
Also, market sentiment,
which is often a reaction to the news, may play a major role in increasing
currency rates. If traders think a currency is heading in a certain direction,
they will trade accordingly and may persuade others to follow the same, causing
demand to either increase or decrease.
How does forex trading
work?
There are a variety of
different ways that you can trade forex, but they all work in the same way by
buying one currency and selling another at the same time.
Traditionally, many forex
transactions are conducted via a forex broker, but with the increase in online
trading, you can benefit from forex price movements by using derivatives such
as CFD trading.
CFDs are leveraged
products that enable you to open a position for a fraction of the total value
of the trade.
Unlike products without
leverage, you do not take ownership of the asset, but rather you get a position
according to what you expect from a rise or fall in the market value.
Although leveraged
products may multiply your profits, they may also multiply your losses if the
market moves against you.
