Forex markets are global, decentralized marketplaces for the trading of currencies. The market is not centralized like a stock exchange, and is instead conducted over-the-counter through banks in major financial centers around the world.
Retail traders, private investors and corporations all take part in the forex market. Understanding how the market works is key to successful forex trading.
Currency Pairs
Currency pairs are the building blocks of Forex markets. When you trade a pair, you’re essentially buying one currency while selling another. The price of the pair is determined by the market. It is important to understand the different factors that influence currency prices in order to make informed trading decisions.
While some people exchange currencies at a foreign-exchange bureau (for example, to buy or sell traveller’s checks), the vast majority of Forex trading is done by large institutions and individuals who speculate on future currency prices based on a variety of economic and political factors. These traders are attempting to profit by buying currencies whose value they believe will rise, and getting rid of currencies whose value they expect will decrease.
There are dozens of different currency pairs, but seven major ones account for about 75% of all Forex trading volume, according to CMC Markets: EUR/USD, USD/JPY, GBP/USD, AUD/USD, NZD/USD and USD/CHF. There are also minor pairs and exotic pairs, but they generally have less liquidity.
Most Forex trading occurs on the spot market, which is a global network of brokers that facilitates trading 24 hours a day, five days a week. The price of a currency is determined by supply and demand, with the exception of some intervention from central banks. The spot market is also a decentralized market, unlike the centralized futures market, and therefore is not subject to the same level of regulation.
Leverage
As a forex markets, forex moves 24 hours a day and has the highest liquidity of any financial market. This means that traders can easily buy and sell currencies at any time of the day, with prices reacting quickly to breaking news and economic announcements.
Like any other market, forex is driven by supply and demand. Traders are seeking to buy currencies that they believe will increase in value and sell currencies that they expect to decrease in value. In addition, other factors that can influence price fluctuations include interest rates, a country’s debt position, its pace of economic growth and political events.
Leverage is a key feature of forex trading and can be used to magnify your profits or losses. Essentially, leverage allows you to trade with more money than your actual account balance by borrowing money from your provider. In order to use leverage, you must first make a deposit known as margin into your trading account. This amount is then used to cover your trades when they go against you.
In addition to leverage, the forex suggest also offers a bid-ask spread. This is the difference between the maximum amount that buyers are willing to pay for a currency and the minimum amount that sellers are willing to accept when selling it. The larger the bid-ask spread, the less profitable your trade will be.
Contracts for Difference
Forex markets are global marketplaces that allow traders to buy and sell currencies. They are open 24 hours a day, five days a week.
The forex markets is driven by the forces of supply and demand. For example, a country’s debt can affect its currency’s price. A nation with high debt can lose investors and thus, its currency may depreciate. Conversely, a country with low debt can attract investors and its currency may appreciate.
CFDs are cash-settled derivative products which give you exposure to the underlying asset’s price movements. They allow you to trade on margin, meaning that you can control large positions with a small amount of capital. They can be traded on the spot and CFDs markets.
If you believe that the price of an FX ‘base currency’ will rise relative to the ‘counter currency’, then you can open a buy (or long) position in that pair. Alternatively, you can open a sell (or short) position if you think that the price of an FX ‘base’ will fall relative to the ‘counter’ currency. If you’re selling an FX pair, then you would receive one unit of the ‘quote’ currency in exchange for one unit of the ‘base’ currency. This is known as the FX rate. The higher the FX rate, the more you’ll make when you sell a currency pair.
Trading Platforms
Forex trading platforms offer traders a variety of functions to help them make trades. These include displaying current and historical prices, providing charting tools and providing real-time news feeds. They also give traders the ability to place orders with their brokers, such as buying and selling currencies in order to profit from changes in currency pair prices.
All forex trading transactions involve a ‘currency pair’, with the base currency being traded against the quote or counter currency. A trader can buy a currency pair, known as going long, or sell a currency pair, known as going short, depending on their view of the future direction of the currency pair’s price.
Like most markets, forex is driven by supply and demand. For example, if a country’s central bank announces it is tweaking money supply through quantitative easing, that may boost its economy and drive up the value of its currency.
There are a range of market participants in the forex market, from multinational companies that need to exchange currencies as part of their daily operations, to investors and central banks who are involved in hedging currency risks. Retail traders, such as yourself, are primarily concerned with the spot forex market, which is where most forex trades take place. However, there are a number of other markets that are used by market participants including forwards and futures.
