What is forex trading?
The Foreign Exchange Market (Forex Market) has been around for a long time and is one of the world’s most traded financial markets. Forex is the transaction of changing one currency into another currency. Forex is necessary because countries buy and sell from one another. For example, if Italy wants to sell to America, they need to base their transactions on an exchange between the Euro and American Dollar.
The forex market is mainly made up of banks, businesses, and investment companies. These are considered as the main players and stakeholders in the market. But there are also individuals who engage in forex trading as a legitimate endeavour with the purpose of making profit.
Types of forex trading
The types of forex trading available are:
- Forward Forex – This is when a contract to sell or buy currency is agreed upon but for a specified future date or dates.
- Future Forex – A futures contract is legally binding and the agreement is to sell or buy a specific amount of currency at a set price on a specific date.
- Spot Forex – This involves a physical exchange of a currency pair (Euro/Dollar) and then the entire transaction is completed immediately.
Forex trading mainly takes place digitally and – unlike crypto trading – it’s based on tangible assets which are currencies. There are many platforms where one can do forex trading, such as Fidelity Investments, Ava Trader, MetaTrader 4 and others. Most reputable platforms offer a one-stop shop where you can trade commodities, stock, crypto, and forex.
Making a profit
Profit in forex trading is made through the price changes of the different currencies. The price is affected by daily currency conversions. The more currency that is converted, the more volatile the pricing becomes. Traders don’t walk around with physical currencies on them or physically trade currencies; instead they make exchange rate predictions and then take advantage of price movements to buy – the goal being selling high and buying low.
More on Forex Trading
Currency is traded in pairs where one currency is sold while the other is bought simultaneously.
For example, EUR – 1.8519 / USD – 1.8512
In this EUR/USD example, one currency is a base (EUR) and the other is a quote (USD). The price of the pair is determined by how much it costs the quoted currency to buy one unit of the base currency. You can then forecast the movement of this pair price and buy/sell accordingly. Forex trading is a live market and constantly changing. You need to bear in mind that external factors such as politics and other global issues can have an impact on the value of a currency.
There are different types of pairs that are used in forex trading.
- Major pairs make up 80% of all global forex trading, including EUR/USD, GBP/USD, and USD/JPY.
- Minor pairs are less frequently traded and usually exclude the US dollar. An example would be EUR/GBP or EUR/JPY.
There is a lot more that goes into forex trading. To be successful, knowledge is key. There are online educational resources such as tutorials, webinars, and training videos that anyone can learn more from, on forex trading.