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What is Forex trading and how does it work
Do you know what Forex is? In this post, we are going to describe how this forex market works and why it is so famous.
Most of you should have heard something about the Forex trading market but very few truly know what Forex trading is.
Forex is a shortened version of Forex exchange and it is the biggest financial asset market in the planet. Forex trading is based on the sale of currencies around the planet, with a daily trading volume of more than five trillion dollars. The Forex is a globally run market. It is open twenty-four hours a day, 5 days a week.
The Forex market is made up of currencies from all over the planet, the number of factors that can affect the price change. Anyway, like most financial markets, Forex is initially affected by the laws of demand and supply, and it is vital to know what these are and how price changes are caused.
There are 3 different types of Forex markets:
Forex forward market: a contract is established to sell or buy a fixed amount of currency at a certain price, and whose expiration is made on a future date.
Forex spot market: this is the physical currency exchange pair, which takes place at the right moment in which it is settled or after a little margin of time.
Forex future market: a contract is agreed to sell or buy a certain amount of currency at a set price, on a fixed date in the future. Unlike a forward, a future contract is legally binding.
How does Forex trading work?
Forex trading is performed on the decentralized base twenty-four hours five days per week. The key feature that makes it different from investing in other types of securities is currency pairs. So, investors have to buy and sell currencies simultaneously. When it comes to forex quotes like EUR/USD= 1.1400, it is necessary to know that the base currency is on the left, the quote currency is on the right. The equation means that One Euro is exchanged for 1.1400 US dollars. For example, if a trader wants to purchase 1000 euros, with such an exchange rate he should pay 1140 American dollars. In case the exchange rate rises to 1.1500, he can gain revenue of $100 by selling euros.
What moves Forex markets?
Like any other world market, forex is moved by supply and demand. There is a big range of factors, influencing the forces. Here are important ones.
The political situation by the national government and central banks, unemployment, level of inflation, etc, has a big impact on the currency price.
Positive news reports about the political situation and region’s economy can foster investments in its currency and improve its positions in forex.
Trader’s beliefs and expectations can also impact the rise and fall of currency demand. If many investors share the same sentiment, they may influence others to follow their example.
The political situation in the country is directly proportional to the attractiveness of its currency in the forex market. Thus, political instability and uncertainty can badly impact the currency value and conversely.
How to Trade Forex
Now that you know the general ideas let’s move on to the next steps:
Pick a currency pair
When trading forex you will forever buy one currency while selling another at the exact time. Because of this, you will forever trade currencies in a pair. Most new traders will begin out by trading the most generally offered pairs of big currencies, but you can trade any currency pair that is accessible on the trading platform as long as you have sufficient money in your account.
Analyze the market
Analysis and research is the base of trading endeavors. During researching, you will find the best amount of forex resources, which is overwhelming at first. But as you research a special currency pair, you will find precious resources that stand out from the rest.
Read the quote
You will view 2 prices shown for currency pairs. The first rate is the price at which you can sell the pair of currency and the second rate is the price at which you can purchase the currency pair. Difference between 2 rates is known as spread.
Pick your position
In Forex trading you can guess the currency on down and up movements in the market.
- With a buy position you trust that the value of the base currency will increase matched to the quote currency. For example if you are buying USD/EUR, you believe the price of the euro will strengthen against the dollar.
- With a sell position you trust that the value of the base currency will fall matched to the quote currency. For example, if you are selling EUR/USD, you believe the price of the euro will drop against the dollar.
Forex trading strategies
Forex traders use FX trading techniques to guide their selling and buying activities, whether it be from trading at home or office. The capability to follow a technique that informs trader’s decisions is what differentiates trading from guesswork. Many traders make strategies by adopting elements from other trading techniques, but tailor the systems to meet their own specific needs.
A currency trading technique generally contains a number of technical indicators and forex signals. A forex trading signal can give prompts to help determine exit and entry points for a given forex market. These signals can be determined by either automated or manual techniques. Manual techniques involve looking at chart patterns and averages to determine sell and buy opportunities. Automated techniques use algorithms that decide on trading signals and perform trades based on several pre-set situations.
You can use many trading techniques to tell your trading decisions. Forex trading techniques, like other trading methods, can be based on a mixture of fundamental analysis and technical analysis. Fundamental and technical analyses are very different, so a mixture of the two can be used to develop a more perfect trading technique.