What is Forex trading and how does it work?

Forex trading (in short) means the exchange of a foreign currency for another currency in order to profit from relative price movements.

Understanding how forex trading works starts with learning the basics and having a solid background knowledge about forex.

To achieve a consistent level of profitability, comprehensive basic training is very important.

Physically, a bank, online payment platforms, foreign exchange trading or forex brokers online stock trading platforms there are several tools to make; many of these latter financial market asset classes (bonds, stocks, currencies, commodities, etc.) covering provides hassle-free trading opportunities.

The Forex market is known as the largest and most liquid financial market in the world, with trillions of dollars traded daily. It now has an estimated global daily turnover of more than US$5 trillion, rising from US$6.5 trillion in just a few years.

Monday Friday, the market is open for 5 hours a day (24 days a week) for institutional banks, commercial hedgers, institutional investors, hedge funds, large speculators and retail traders. indices, metals and other securities.

What makes the Forex market unique is the decentralization of networks and electronic trading through computer networks, known as the Over-the-Counter (OTC) market.

Continue to the end of this article as we tell you the basics of how forex works.

What is Forex trading and how does it work
What is Forex trading and how does it work

Types of foreign exchange markets

Currency trading in financial markets is of three different types.

Spot forex market:
This is a non-exchange market for spot trading or spot transactions.

Spot trading refers to the purchase and sale of foreign currencies, financial instruments or commodities for instant delivery on a specific spot date. This involves the physical delivery of a traded asset when the trade takes place.

The exchange rate on which these transactions are based is called the Spot Exchange Rate.

The spot market is dominated by banks and large institutions, but Forex derivatives are offered by intermediaries based on spot forex prices.

Forex market:
This is an over-the-counter Sunday, where there are special agreements to buy or sell a certain amount of money at a certain price at a certain time.

Futures forex market:
This is similar to the futures forex market, except that contracts can be bought and sold on futures exchanges.

Currency pairs (Base and Contrarian currency)

A currency pair refers to two currencies that are traded in pairs. This means that one currency is sold to buy another, and vice versa. Each currency in a pair is represented by a unique three-letter code.

The first currency code of a currency pair is the base currency, while the second currency of the pair is called the opposing currency.

From the letters of the code, you can identify a country and its currency.

For example;

THE BRITISH POUND. GB represents Great Britain and P ‘ represents the Pound

USD, US represents the US and D represents the Dollar

Although there are exceptions to this, the EUR represents the European continent and the currency “Euro”.

Forex Prices

Forex prices refer to the value of one unit of the base currency in the opposite currency. This is also known as the exchange rate, because it refers to the value of one currency in terms of another at a certain time.

For example, the current price of USD/JPY can be quoted at 0.6191.

Where the price of a unit JPY (the base currency) is worth USD (the opposite currency).

If USD/JPY is trading at 0.6191, then 1 JPY will be worth 0.6191 USD.

If the USD rises against the YEN, then 1 USD will be worth more YEN, and the price movement of the currency pair will rise, on the contrary, if the USD falls, the price movement of the currency pair will also fall.

So, if your technical and fundamental analysis predicts that the base currency will strengthen against the opposing currency, you can open a long position in the currency pair, and if your analysis predicts a decline in this regard, you can also open a short position in the currency pair. the currency pair.

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