Foreign Exchange Trading, commonly termed as Forex trading, is the decentralized market for the trade of different currencies. In the Forex Market, the exchange rate or spot rate plays a very crucial role in determining the values of the base currency and the quote currency. This forms a combination of currency pairs. In simple words, the price of one currency is always determined in another currency because you always buy one currency using another currency. Currency pairs are like EUR/USD. They use Standardised Currency Code to show currency pairs. EUR/USD, USD/JPY, GBP/USD, and USD/CHF are the most traded currency pairs.
Foreign Exchange changes all the time due to various factors, and forex traders attempt to make a profit from these changes. Forex is the largest and one of the most volatile financial markets in the world. The daily volume of the Forex market is enormous, which is around $5.1 trillion. It operates 24 hrs/day five days/week in 4 different forex exchanges: Tokyo, London, Sydney, New York.
When trading Forex you’ll very often hear the terms “Retail” and “Institutional”.
- Institutional includes significant capital funds and companies.
- Retail is the individual Forex traders.
To get started with trading
Forex trading is just like trading in shares, but rather than shares, it trades in currency pairs. It’s actually pretty simple to understand forex trading:
- You need to have an account with a forex broker to start forex trading. Many brokers don’t charge any commission on Forex trading.
- A currency pair is commonly denoted as EUR/USD, where EUR is the base currency you are spending, and USD is the quote currency that you are purchasing. These pairs will help you to know how much of the quote currency is required to purchase the base currency.
- The bid price is the highest price that a buyer is ready to purchase base currency in exchange for quote currency. The asking price is the lowest price at which a trader is ready to sell a currency.
- The price gap between the buying (bid) price and selling (ask) price is referred to as Spread. This is the actual profit of brokers.
- Forex brokers offer leverage, and you can take leverage up to 400 times.
Ways to trade in Forex
There are actually three ways you can trade Forex: Spot Market, Forward Market, and Futures Market.
- Spot Market: In the spot market, one buys/sells the currency as per the current market rates.
- Forward Market: In this, both parties are agreed to buy or sell a set amount of a currency at a specified price, to be settled at a set date in the future, or within a range of future dates.
Futures Market: In this, both parties are agreed to buy or sell a set amount of a given currency at a set price and date in the future.
