What is Forex Trading?
The foreign exchange market, also called the currency market or forex (FX), is the world’s largest financial market, with over $5 trillion traded daily. It dwarfs all other markets, including the stock market. The FX market is open 24 hours a day, 5 days a week, making it convenient for traders to enter and exit trades at any time. The market is also highly liquid, meaning that there are always buyers and sellers willing to trade.
Unlike traditional markets, forex is not conducted on an exchange, but rather through an electronic network of computers. There are three main venues for forex trading: the spot market, the forward market, and the futures market.
In forex trading, a person buys or sells a currency pair at a specified price. Currency prices are listed from a forex broker’s perspective, so a potential buyer would place a bid and a seller would request a price. The difference between the two is known as the spread, and it affects the price of the currency pair. This spread is determined by many factors, including the volume of a trade, the demand for the currency, and the volatility of the market.
Forex trading is similar to buying and selling stocks. The goal is to predict the value of one currency versus another. When you buy one currency and sell it tomorrow, you make a profit if the price goes up. This strategy is called going long. When it goes the other way, you make a loss.
The main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends.
The Ask and the Bid price
A currency pair’s price is determined by two fundamental values: the ask price and the bid price. The bid price is the price at which a forex broker is willing to buy the base currency from you and the ask price is the price at which he’s willing to sell the base currency to you.
EUR/USD is one of the most popular forex pairs
Since currencies are always traded in pairs, the foreign exchange market does not set a currency’s absolute value but rather determines its relative value by setting the market price of one currency if paid for with another. Ex: 1 USD is worth X CAD, or CHF, or JPY, etc.. EUR/USD is one of the most popular forex pairs, and traders can trade it with a variety of methods and strategies.
When you buy EUR, you’re buying 1.3 units of the base currency. When you sell EUR, you’re selling one unit of the quote currency. The EUR/USD currency pair is closely linked to the U.S. and European economies. Traders pay attention to news and events that affect both countries’ economies. Interest rate updates, unemployment data, and Treasury yields are among the events that can affect the EUR/USD.
EUR/USD pair was the most traded pair in 2020 ( Source: https://www.statista.com/)
High leverage means large profits and also large losses
The forex market is unique in its ability to offer high leverage. Because of this, it can be easier to make large trades in a short period of time. Furthermore, forex trading can be done using small, micro lots that are available in many forex brokers. Micro lots can be as low as 10 units, making it easy for anyone to get started in forex trading.
How to start Forex trading?
Opening a brokerage account
Before you can start forex trading, you first need to open a brokerage account. This process is usually simple and can be done online through the broker’s website. It’s important to work with a regulated broker. A broker regulated by a top government agency like the FCA guarantees client funds are held in segregated accounts, they have negative balance protection, and they have compensation funds in case of insolvency. In contrast, offshore forex brokers have less regulatory oversight and are generally riskier.
Start with a demo account
In order to be successful, traders must determine which trading style works best for them. While trading the forex market can be difficult, it is essential to be aware of the market dynamics and make the best trading decisions. It’s important to remember that the forex market is volatile and that your profit potential depends on the type of trade you make. Using a demo account will help you practice trading while gaining an understanding of how the currency exchange market works.
The currency market has existed for centuries and is used for a variety of purposes. Major corporations doing business overseas use it to hedge their risks and diversify their investments. Individuals and small companies use it to invest in different currencies. However, it’s important to understand the risks involved and how to avoid them.