What is Forex Trading? [video]

Foreign exchange or Forex for short - refers to the exchange of currencies on global markets.

The Forex market is open 24 hours a day and is the largest fx market around the globe, with an average daily trading volume in the trillions of dollars. This is because currencies need to be exchanged for so many reasons in our modern interconnected world. One of those reasons is traders trying to make money with the help of every nation's central banks.

Forex Trading Example

For example, a Swiss family decides to buy a holiday villa in the South of France. Swiss francs will need to be exchanged into euros. For that to happen, a bank in Switzerland will be trading forex with a bank in France. If the same were to happen between Switzerland and America, there would be an exchange of Swiss Francs and the U.S dollar. Such deals are done in the bank for international settlements. 

When two banks are involved in  trading, they don’t do it over a central exchange like the SIX Swiss Exchange. Partners do it between themselves in what is called an over-the-counter (or OTC) trade. All the forex trades are put together to create the decentralized OTC price for all investors in the stock markets.

When two banks are involved in forex trading, they don’t do it over a central exchange like the SIX Swiss Exchange. They do it between themselves in what is called an over-the-counter (or OTC) trade. All the forex trades put together to create the decentralized OTC foreign exchange market.

Why Do Exchange Rates Change?

Forex traders are speculating on whether one country’s economy and currency prices will outperform that of another. The bottom line is that if an economy is doing well in the financial market, the typical result is that interest rates in that country go up.

A higher interest rate makes a currency more valuable because of the higher income that can be earned by any currency trader holding it. The huge volume in forex markets means exchange rates change frequently and currency values change therefore offering opportunities for traders and forex brokers to buy and sell for a profit.

And how is forex trading done in the Foreign exchange market?

According to forex, currencies are bought and sold in pairs 24 hours a day five days a week, around the world. This means that retail traders are simultaneously buying one currency while selling another in the currency FX trading market. 

The most traded currency pair is EUR/USD. If you think, one currency, in this case the dollar or the euro will go up in value, you will buy EUR/USD. However, if you think the U.S dollar will go up in value, you sell the same. A currency pair's supply and demand are determined by the forex market's players.

Types of Forex Pairs 

Currency pairs are separated into four distinct categories for easy differentiation in the currency markets. Major pairs, which involve the dollar paired with any other major currency like the euro or the Swiss franc and USD/JPY.

Cross-currency pairs which features major currencies except for the dollar forex pair. These include currencies like the Japanese Yen and British Pound. Crosses in the market forex between major trade currencies and other developed nation currencies are referred to as minors. 

Through cross-currency trades, people from different countries have been able to maintain different trade flows on the stock exchange markets and buy or sell two currencies without converting to the U.S dollar. Finally, exotic pairs, which involve trading options and currencies from an emerging economy.

What is Foreign Exchange Spot?

An FX spot is a spot market agreement between two parties to buy one currency against selling a different currency in the foreign exchange markets. There will be a settlement on the spot date in the future. The spot exchange rate is the rate at which the transaction is carried out. 

To be able to trade, you need a trading account to carry out a forex transaction. You can trade any currency pair as many individual traders do. The base currency can be the dollar, while the second currency could be anything that gives you the hope to make profit.  

This concludes our introduction to the daily trading exchange rate in the forex market.

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