What is forex trading

What is forex trading

Forex (Foreign Exchange) is the abbreviation for foreign exchange. It’s defined as the market place where currencies are traded or simply trading in the foreign exchange market. Forex is also defined as a global decentralized marketplace that is used for the trading of currencies. Forex is the world’s most traded market with an average turnover in excess of approximately $4 trillion in a day. It’s the biggest financial market in the world.

Forex trading usually involves the simultaneous buying of one currency and selling another for the purpose of speculation. The value of different currencies rise (appreciate) and fall (depreciate) against each other due to various factors such as economics or geopolitics.

While the changes can bring about positive or negative results, the main aim of the forex traders is make as much profit as possible by actively speculating the forex prices in the future.

One of the main reasons behind forex trading popularity is that it trades 24-hours a day from Sunday evening to Friday night. This provides multiple trading opportunities because the currency prices are constantly fluctuating in value against each other.

Foreign exchange is basically a leveraged or margined product. This simply means that only a small percentage of the full value of your position to place a forex trade is required. In other words, the potential for the profit or loss from the initial capital deposited is higher than in the traditional trading.

In forex, pricing is determined by the “base” currency and “counter” currency. For example in EUR/USD currency pair, the base currency in the EUR while the counter currency is the USD. The prices are triggered by the currencies either appreciating or depreciating in value, also referred to as strengthening or weakening. A good example is when the price of EUR/USD falls, it simply means that the USD (counter currency) is appreciating and the EUR (base currency) is depreciating.

When trading, it’s highly advisable to buy a currency pair whose base currency will strengthen against the counter currency. Likewise, you should sell a currency pair whose base currency will weaken in value against the counter currency.

Another term used in forex trading is Pips (Percentage in Points). Majority of the currency pairs are quoted to five decimal places with the change from the fourth decimal place in price -0.0001. This is referred to as a pip. If the price of EUR/USD pair moves from 1.44800 to 1.44920, the pair can be said to have climbed 12 pips (subtract the two values).

The “spread” is referred to as the bid of the currency pairs. For example, if the EUR/USD price is 1.44800/1.44920, the spread would be 0.0012.

The need to exchange currencies is the main reason why the forex market is the largest and most liquid financial market in the world. The New York Stock Exchange alone has a daily turnover of approximately $50 billion.

Speculation is the most important aspect in forex trading because it determines whether a trader loses or gains.

The price fluctuations in forex trading are affected by several factors-Political and economic stability, currency intervention, monetary policy, and natural disasters.

Categories: Tutorials


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