You've most likely heard of the term forex but assumably have no idea what the fuss is. Continue reading to find out what is forex and what you need to have an understanding of the basics. Forex is also known as FX or foreign exchange and is a network of sellers and buyers who trade single currencies for others at a price that's agreed upon. Earning a profit is the primary purpose of currency trading. Foreign exchange trading takes place on the foreign exchange market, otherwise known as the forex market. You will probably have been making a forex transaction if you have travelled outside the country.
When the quantity of currency gets converted every day, volatility exists, which affects price movement. The volatility appeals to traders, as with risk increases, they can get high profits.
What is the Forex Market?
Forex trading occurs between two parties in an over-the-counter (OTC) market. With no centralized location, it's the most significant and most liquid market worldwide. Forex is available for trading 24/7 due to there being no central location.
The forex market spreads across four main trading centres in different time zones, specifically New York, London, Tokyo, and Sydney. Because traders work across various time zones, the forex market is available five days a week.
There are three different markets in the forex market, that is:
Spot forex market
A spot forex market constitutes the physical exchange of a currency pair. It happens when a trade gets settled, or “on the spot,” and takes place in a short period.
Forward forex market
A forward forex market happens when there's an agreed contract, where a precise amount of a particular currency is sold or bought at a certain price. The settlement of this transaction gets future dated or in a certain range of future dates.
Future forex market
A future forex market happens when there's an agreed contract, where a precise amount of a particular currency is sold or bought at a specific price, at a certain future date. A futures contract differs from a forwards contract, as there's a legally binding contract involved.
Influences of the Forex Market?
The forex market contains currencies from across the globe, making it challenging to predict the exchange rates. Multiple factors provide a contribution to price movements, the primary factor being supply and demand. Price fluctuations get influenced by the following components:
Several News Reports
Commercial banks and investors place their money into economies with positive news. Demand rises for that particular region's currency, as positivity promotes investment. On the other hand, investments decrease, and price lowers of that region's currency.
Market sentiment occurs when there's a reaction to the news, which drives currency prices. Demand decreases or increases by what traders consider regarding currencies and the path they're headed in. Traders then trade by what they think, and others would follow their example.
Supply gets controlled by central banks, where currency prices can get affected considerably. There will be a decline in the currency price when the economy gets injected with additional money.
Economic data shows an economy's performance and glimpses into the next move for a central bank.
Reducing risk is an investor's primary goal, and an attempt will get made by getting the maximum return from a market. Investors will consider credit ratings with the information they obtain from interest rates and economic data.
How a country pays its debts indicates its credit rating. A country is safe for investment if there's a high credit rating, and there will be an increase in the currency's price.
Base and Quote Currency Differences
The base currency is the first currency that gets listed in a forex pair. The quote currency is the second one listed. Because you're selling one currency to purchase another, forex trading gets quoted in pairs always. The price of the forex pair gets determined by the value of one unit of the base currency in the quote currency.
The currency pair gets distinguished by a three-lettered code. The region is indicated by the first two letters, and the currency is indicated by the last letter. An illustration of a currency pair is the GBP/USD, which involves buying the Great British Pound and selling the US Dollar.
Applying the above example, the GBP is the base currency, and the USD is the quote currency. If GBP/USD trades at 1.65432, then one pound is worth 1.65432 dollars.
If the pound rises against the dollar, then one pound is worth more than the dollar, and the pair's price increases. If it drops, the pair’s price will decrease.
Go short (sell a pair) – If you think the base currency in a pair will weaken against the quote currency.
Go long (buy a pair) – If you think the base currency in a pair will strengthen against the quote currency.
How Do You Trade Forex?
Most forex trades get made through a forex broker. However, you can make use of derivatives such as contract for differences (CFD trading).
CFDs are leveraged; therefore, you can open positions for a small fraction of the total value of the trade. The ownership of the asset doesn't get taken, but a position gets taken on the belief of whether there's a rise or fall in the market's value. There's a downside – if the currency you're purchasing has a loss, then the leverage can increase your losses.
Is there Regulation in the Forex Market?
There's not much regulation even though the forex market is enormous, as there are no regulators to keep an eye on it 24/7. Nevertheless, globally, multiple national trading bodies oversee forex trading domestically to ensure that specific criteria get adhered to.
Getting Started Trading Forex
If you are interested in currency trading, the initial action you need to take is finding an FX broker who is regulated and conducts honestly and ethically. Avoid trading with your emotions and practice with a demo account to comprehend how the forex market operates.
Don't sway from your goals and trading analysis, and never trade with more than you can afford to lose.
You can begin your journey to accumulating wealth once you're comfortable with what forex is!