The market for trading forex or foreign currencies is known as foreign exchange trading, or forex trading or FX. The largest market in the world, forex, and what happens in it, influence real, everyday life. For example, unpredictable price movements, depreciation of a currency, or the appreciation of another currency, can affect the cost of everyday goods, make imports or exports cheaper, and influence consumers’ spending power. Money does make the world go round and has a significant impact on our lives.
What is Forex Trading?
Forex traders usually register with a CFD forex broker or forex trading brokers who have built a reputation in the industry. Many online forex brokers and traders should pick one that provides all the resources and tools they need or find essential, as well as one that can provide services to their country. Good reputable online forex brokers provide all the necessary information to open an account and to trade with them on their websites, and they usually offer customer support that can assist traders with all their questions.
The foreign exchange market is a global market that is open 24 hours a day, seven days a week, for currency trading. All forex trading is over-the-counter (OTC), which means there is no physical exchange and the market is regulated by a global network of banks and other financial organisations.
Institutional traders, including those employed by banks, fund managers, and multinational organisations are the main big traders in the forex market. These traders are speculating on, or hedging against, potential exchange rate swings; they do not actually buy the currencies themselves for the sake of owning them. If a forex trader thinks the dollar will appreciate in value and s/he will be able to purchase more CFD pounds in the future, s/he might buy dollars CFDs (and sell pounds CFDs).
How to Trade Currencies
Every currency is given a three-letter code. So the US dollar has the code USD and the pound, GBP. While there are more than 170 other currencies in the world, the US dollar or greenback, as is also known by forex traders, is used in the vast majority of forex trades. The euro is the second-most popular currency on the foreign exchange market.
Other popular currencies are the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD), the New Zealand dollar (NZD) and the Swiss franc (CHF).
When traders trade forex, they are always buying or selling CFDs on currency in pairs. There are major currency pairs or majors, minors and exotics. The major currency pairs include the USD and are the following seven currency pairs:
- EUR/USD
- USD/JPY
- GBP/USD
- AUD/USD
- USD/CAD
- USD/CHF
- NZD/USD
Currency Pairs in Forex Trading
Each currency pair displays the two currencies’ most recent exchange rates. Using the GBP/USD, or the pound-to-dollar exchange rate, as an example, here is how you can read the pair. The currency on the left (the pound) is the base currency. The currency on the right (the US dollar) is the quote currency. By calculating the exchange rate, you can determine how much of the quote currency is required to purchase one unit of the base currency. As a result, the quotation currency varies depending on the market and how much is required to purchase 1 unit of the base currency. The base currency is always expressed as 1 unit. If the GBP/USD exchange rate is 1.08, that means £1 will buy $1.08 (or, it will cost $1.08 to buy £1).
If the exchange rate of the GBP/USD rises, then it means that one pound will buy more dollars and shows that the base currency’s value has increased relative to the quoted currency.
On the other hand, if the exchange rate falls, then the base currency’s value will fall too. In each currency pair, the base currency is shown first and the quote currency is shown second.
How to Start Online Forex Trading
Most forex trades are made with the sole purpose of taking advantage of price fluctuations by speculating on whether the value of a particular currency will go up or down. If a trader believes a currency will go up, then they will buy it, and if they believe it will go down, they will sell it. In order to gain an understanding of how the market works and to be able to speculate with confidence about the change in currency value, it is good to read about currencies and follow an economic calendar closely. By being aware of all the market-moving news and events you will be able to anticipate, within reason, if the value of a currency will go up or down. For example, when global market sentiment is weak and traders tend to avoid risk currencies, they usually buy safe-haven dollar CFDs. During periods of political uncertainty and global economic concerns, the dollar and the Japanese yen tend to strengthen as they are both safe-haven currencies.
Forex Trading in the Spot, Futures and Forward Markets
The spot market is the main forex market where CFDs on currency pairs are exchanged in real-time, based on supply and demand. The futures market refers to the market that deals with futures contracts to buy or sell CFDs at a fixed currency amount at a specific exchange rate in the future. The forward market refers to the market that deals with forwarding contracts. Forward contracts can be used for hedging and speculation, but they can be tailored to a customer’s requirements.
Let’s Talk Forex: Some Useful Terms
If you are going to start trading forex, then you will need to learn the language, or at least start with some basic terminology.
- Pip. A pip, which stands for percentage in points, denotes the smallest price variation that can occur inside a currency pair. A pip equals 0.0001 since foreign exchange rates are quoted with at least four decimal places.
- The Bid-Ask Spread. The highest amount buyers are ready to pay for a currency is the bid, and the lowest amount sellers will sell is the asking price. These are two of the factors that determine exchange rates. The bid-ask spread is the difference between these two sums and the price at which a trade will be executed.
- Lot. A lot is a standardised number of units of an asset, in our case of a currency that is being traded.
What Influences Currency Prices?
When you are trading forex, you need to be aware of the forces of the market and what moves the prices of currencies. Currency prices are affected by the supply and demand of sellers and buyers, but also by Central Bank decisions and policy meetings, geopolitical events and macroeconomic data that demonstrate how well the economy of a country is doing.
Traders are usually attuned to market data and economic releases and always keep an eye on the financial markets, politics and big events that can create sharp increases or decreases in currencies.
Leverage when Trading Forex
When trading forex via CFDs, traders can use leverage which can multiply your profits and losses too. Traders need to be aware of leverage and how much to use, especially when they are just beginning to trade. With currency prices going up or down sharply, traders can execute multiple traders using leverage and target potential profits. However, since the market is unpredictable, and currencies can fall or rise, too much or too little, traders need to be careful and have a risk management plan.
Why does Trading Forex Matter?
If you’re interested in forex trading and want to give it a try, you’ll need to make sure that it’s the right market for you and that you have the time and funds to explore it. Here are some of the reasons given by traders about why trading forex is appealing to them:
It’s a large and global market with trillions of dollars being exchanged daily
- Free demo accounts
- Low costs
- Leverage
- High liquidity
- The volatility that can provide trading opportunities
- Modern technology and good trading platforms
Additionally, recognised and trusted brokers provide a wide range of educational content, including webinars, tailored forex articles and research for all levels of traders, and many more. If you would like to learn more, head over to IronFX’s website and check its Trading School and other resources.
