What is Forex Trading and how does it work? 101 Guide

What is Forex Trading and how does it work?

September 24, 2020
1 month ago

Do you know what Forex is? Have you ever invested in the Forex market? In this post, we are going to explain how this market works and why it is so popular.

Most of you should have heard something about the Forex market but fewer people really know exactly what Forex trading is. In this post, we will give you an introduction to this mythical currency market.

FOREX is a shortened version of Foreign Exchange and it's the largest financial asset market in the world. Forex trading is based on the sale of currencies around the world, with a daily trading volume of more than 5 trillion dollars. The Forex is a globally operated market. It's open 24 hours a day, five days a week (Monday through Friday).

Simply put, Forex trading is the act of speculating on the movement of exchange prices when buying one currency and simultaneously selling another. Currency values rise (appreciate) and fall (depreciate) against each other due to a number of economic, geopolitical, and technical factors.

The Forex market is made up of currencies from all over the world, and the number of factors that can affect price movements makes predictions about exchange rates difficult. However, like most financial markets, Forex is primarily affected by the laws of supply and demand, and it is important to understand what these are and how price fluctuations are caused.

There are three different types of Forex markets:

  • Forex spot market: this is the physical exchange of the currency pair, which takes place at the exact moment in which the operation is settled or after a small margin of time.
  • Forex forward market: a contract is established to buy or sell a fixed amount of currency at a certain price, and whose expiration is made on a future date (or within a range of future dates).
  • Forex futures market: a contract is agreed to buy or sell a certain amount of a certain currency at a set price, on a fixed date in the future. Unlike a forward, a futures contract is legally binding

How does Forex trading work?

There are different ways to trade Forex but they all work the same way: buying one currency and selling another simultaneously. Traditionally, Forex trades were carried out through a traditional broker but thanks to online trading providers, you can now easily invest from wherever you are.

Forex trading is an activity, or even a profession, by which currency pairs are bought and sold to speculate on the rise or fall of the price of these pairs. This activity is open to anyone with a computer and Internet access. Forex trading is a type of day trading and international trading. States, companies, even individuals like you, trade currencies every day.

This trading is carried out through computer networks between traders around the world. This is the main reason that the Forex market or currency market is the largest and most liquid market in the world. It's the most accessible and as a result also the one that is considered the most dangerous.

What is the first currency?

A first currency is the one that precedes the pair, while the next is called the second currency. Forex trading always involves buying one currency and selling another, which is why they are listed as pairs. The price of a pair is determined by calculating how much a unit of the first currency is worth in the second currency.

The currencies of a pair are identified by a three-letter code, in which the first two normally correspond to the region and the third to the currency itself. The most popular currencies available to traders:

• The U.S. dollar • the Euro • the Pound Sterling • the Japanese Yen • the Swiss Franc

These currency combinations form the group of major Forex currency pairs:

• EUR / USD • GBP / USD • USD / JPY • USD / CHF

Most providers classify currency pairs into the following categories:

• Senior pairs. These are the seven pairs that makeup 80% of global Forex trading, including the EUR / USD, USD / JPY, GBP / USD, and USD / CHF

• Minor pairs. These are traded less frequently, and typically contain major currencies other than the US dollar. Includes EUR / GBP, EUR / CHF and GBP / JPY

• Exotic pairs. These are made up of a major currency versus another in a small or emerging economy. Includes USD / PLN, GBP / MXN and EUR / CZK

• Regional peers. These are pairs classified by region, such as Scandinavia or Australasia. Includes EUR / NOK, AUD / NZD and AUS / SGD

To learn more about Forex trading subscribe to the Trader Club and our YouTube channel where you will find strategic tools to help you train to become a financial professional.

CANAL TRADER

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