What is Forex Trading and how does it really work - tutarchive

What is Forex Trading and How Does it Really Work?

The Foreign exchange market, aka Forex, FX, or currency market is an international decentralized or over-the-counter (OTC) market wholly and solely reserved for the trading of currencies. 

This best thing about this market is that it determines foreign exchange rates for each and every currency that exists in this world. It includes every aspect of purchasing, selling as well as exchanging currencies at existing or determined prices.  

While having a daily trading volume of $5 trillion on average, it is undoubtedly one of the most actively traded markets in the world. 

The origin of Forex trading can be traced back to the time when people would need foreign currency for usage while traveling in other countries, and hence the concept of FX Trading came into existence. This would involve exchanging some of the currency of their home country with another currency at a bank or foreign exchange broker. In return, they would be given their foreign currency equivalent to their home currency at the existing exchange rate offered by the bank or broker. 

Whenever we talk about FX trading, we usually mean a type of investment trading that has become a new normal in the contemporary trading market. While keeping in view the universal attraction attached to forex trading, most of the folks wonder how this phenomenon works. That is why, they are interested in trading currencies for themselves. 

How has Forex Trading revolutionized?

Forex trading used to be rather complicated for individual investors before the internet came into play. Because forex trading needed a lot of capital, the majority of the currency traders were big companies, hedge funds, or even high-net-worth individuals. 

How Forex Trading has revolutionized

After the involvement of the internet, a retail market with the primary purpose of reaching to individual traders has emerged, offering easy access to the foreign exchange markets. This process is easily done either through the banks themselves or brokers play their role by making a secondary market. It is worth mentioning here that most online brokers or dealers offer very high leverage to all the individual traders who can easily control a large trade with a comparatively small account balance. 

How do Forex trading markets work?

As far as the difference between shares or commodities and Forex trading is concerned; the latter doesn’t take place on exchanges but instead between two parties in an over-the-counter (OTC) market. 

How do Forex trading markets work

The Forex trading market is run by an international network of banks being spread across as many as four major forex trading centres in several time zones i.e. London, New York, Sydney and Tokyo. The best part is that there is no central location, so you can easily trade forex 24 hours a day.

There are basically three different types of Forex trading markets, i.e.

Spot Forex trading market

This kind of Forex trading market involves the physical exchange of a currency pair that takes place at the exact point the trade is settled or, in simple words, on the spot or within a short time period. 

Forward Forex trading market

This kind of market is difference from the Spot Forex trading market in the sense that here a contract is agreed to buy or sell a particular amount of a currency at a mentioned price, to be settled at an already agreed date in the future or within a range of future dates.

Future Forex market 

As far as a Future Forex trading contract is concerned, the parties agreed to buy or sell a specified amount of a given currency at an already agreed price and date in the future. However, the point of difference between the Future and Forward Forex market is that a futures contract is legally binding in this case and not in the case of Forward.  

It is worth mentioning here that traders speculating on forex prices won’t plan to take delivery of the currency itself. On the contrary, they will make exchange rate predictions in order to make the most of the price movements in the market.

What is a base and quote currency?

The first currency listed in a forex pair is a base currency, while the second currency is known as the quote currency. 

Forex trading always involves selling one currency, so it is to buy another, which is why it is quoted in pairs. The price of a forex pair is concerned; it involves how much one unit of the base currency is basically worth in the quote currency.

Each currency in the pair is mostly listed as a three-letter code that tends to be formed of two letters that stand for the region, and one stands for the currency itself.

Forex CFD vs Forex trading via a broker

It is worth mentioning here that most of the Forex trading occurs between major banks and certain financial institutions, and they buy and sell colossal amounts of currency every day. 

As far as individual traders are concerned, they don’t have the means for making billion-dollar forex trades. However, there are two main ways of getting involved, i.e. Forex CFDs or Forex trading via a broker. 

1. Forex CFD

A forex CFD is the type of contract in which an individual agrees to exchange the amount of difference in the price of a currency pair from opening your position to closing it. 

A sincere advice would be to open a long position, and if the forex position increases in price, you’ll make a profit. Similarly, you will make a loss if it drops in price. On the other hand, if you open a short position, the opposite will happen. It is also worth mentioning that Forex is just one of the markets where you can trade using CFDs.

2. Forex trading via a broker 

Forex trading via a broker or sometimes through a bank mostly works in a broadly same way as CFD trading. Here, you’re speculating on the price fluctuations of currency pairs without taking ownership of the currencies themselves in actual. If you feel that a currency pair’s price is headed down, you should go short rather than long.

It should also be kept in mind that when you trade forex via a broker, though, you won’t have any kind of access to other markets. 

The experts also highly recommended to choose a licensed and regulated broker having at-least 5 years of experience. If your broker operates by regulatory rules, you can make sure that they are lawful.

Once you have established an active account, you can easily trade; however, you need to make a deposit for covering the expense of your trades. This is known as a margin account.

However, it should also be kept in mind that becoming a profitable trader will take some time as you need to be familiar with the markets, and there is a lot to learn that is new. That is why reputable brokers offer traders a Demo account. This is an amazing way to experiment with several trading strategies, but the point of difference is that you will deal through virtual money, which is why no risk will be there. 

Once you gear up to start live trading, there is a diverse range of trading accounts that can suit you the most. 

Building a successful trading plan

Building a successful trading plan

Truth be told, building a trading plan is extremely crucial for you if you are someone who is new to the markets. A trading plan would help you to take the emotion out of any kind of decision making, and it will also offer you some structure when you opt to open and close your positions. Besides, you should again try to employ a Forex trading strategy that can easily govern how you can find more opportunity in the market.

Once you are done with choosing a specific forex trading strategy, now you have the right time to apply it. That is why you should use your most favorite technical analysis tools on the markets in which you want to you want to trade and also decide as to what your first trade should be.

If you opt to be a purely technical trader, you need to pay attention to any kind of developments that, in your personal opinion, can cause changes in the market. 

Wrapping Up

It is true beyond the shadow of a doubt that trading in any kind of market can be a daunting task, and that is why you need some effort and time to understand and excel in Forex trading. Give some time, and it will all be yours.


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