What is forex and how does it work?

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 actively traded markets in the world, with an average daily trading volume of $5 trillion. Take a closer look at everything you need to know about forex, including what forex is, how it is traded and how forex leverage works.

Unlike stocks or commodities, forex trading does not take place on exchanges, but rather directly between two parties in the over-the-counter (OTC) market. The forex market is operated by a global network of banks located in 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: is the physical exchange of a currency pair, which takes place at the exact point of settlement of the trade - i.e. immediately - or within a short period of time Forward forex market: in which a contract is agreed to buy or sell a specific amount of currency at a specific price, to settle it on a specific date in the future or within a range of future dates Future forex market: in which a contract is agreed to buy or sell a specific amount of a specific currency at a specific price and a specific date in the future. Unlike forward contracts, futures contracts are legally binding Most traders who speculate on forex rates do not plan to take delivery of the currency itself, instead they make predictions 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 a forex pair, while the second currency 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 a 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 code, with the first two letters usually standing for the region, and the third for 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 make up 80% of global forex trading. These include: EUR/USD, USD/JPY, GBP/USD, and USD/CHF secondary pairs. Less traded, and it takes advantage of trading major currencies against each other instead of the US dollar. These include: EUR/GBP, EUR/CHF and GBP/JPY Non-major or unusual 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 categorized 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 as there are many factors that may contribute to price movements. However, like most financial markets, forex is affected primarily by the strength of supply and the strength of demand, and here it is important to understand the influences that lead to price fluctuations. central banks Supply is controlled by central banks, who can announce measures that will greatly affect the price of their currency. Quantitative easing, for example, involves pumping more money into the economy and may cause its currency to drop in price. News reports Commercial banks as well as other investors tend to put their capital into economies with a strong outlook. Therefore, if there is positive news in the markets about a particular region, this will encourage investment and increase demand for the currency of that region. Unless there is a parallel increase in the supply of the currency, the mismatch between supply and demand will cause its price to rise. Likewise, negative news can cause investment to drop and currency price to drop. For this reason, currencies tend to reflect a view of the economic health of the region they represent. Market sentiment Also, market sentiment, which is often a reaction to news, may play a major role in increasing currency prices. If traders believe that a currency is heading in a certain direction, they will trade accordingly and may convince others to follow the same, causing demand to increase or decrease. How does forex trading work? There are a variety of different ways 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 done through a forex broker, but with the rise of online trading you can take advantage of forex price movements using derivatives such as CFD trading. CFDs are leveraged products that enable you to open a position with a fraction of the total value of the trade. Unlike non-leverage products, you do not take ownership of the asset, but take a position depending on whether you expect the market to rise or fall in value. Although leveraged products may multiply your profits, they may also multiply your losses if the market moves against you.

What is meant by spread in forex trading? The spread is the difference between the bid price and the bid price quoted for a forex pair. Like many financial markets, when you open a forex position you will be shown two prices. If you want to open a buy position, you will be trading at the buy price, which is just above the market price. If you want to open a sell position, you will trade at the sell price - just below the market price. What is meant by lots in forex? Currencies are traded in lots - lots of currency used to consolidate forex trading. Since foreign currencies tend to move in small amounts, lots tend to be very large: a standard lot is 100,000 units of the base currency. So, the vast majority of forex trades are done with leverage because individual traders may not necessarily have 100,000 pounds (or whatever currency they trade) to put into each trade. What is meant by leverage in forex? Leverage is a way to gain exposure to large amounts of currencies without having to pay the full trade value upfront. Alternatively, you can place a small deposit, known as margin. When you close a leveraged position, your profit or loss will depend on the total volume of the trade. further