How to trade forex currencies? Forex or foreign exchange can be defined as a network of buyers and sellers who transfer currencies between themselves at an agreed upon rate. This is the means by which individuals, companies and central banks convert one currency into another – if you’ve ever traveled abroad, you’ve probably conducted a forex transaction.
How to trade forex currencies?
While a lot of foreign currency is converted for practical purposes, the vast majority of currency exchanges are done with the aim of making a profit. The amount of currencies converted daily can lead to significant fluctuations in the price movement of some currencies. It is this volatility that makes the forex market so attractive to traders: it brings great opportunities for big profits, but it also carries increased risks.
How do currency markets work?
Unlike stocks or commodities, forex currencies are not traded on exchanges, but rather directly between two parties in an over-the-counter (OTC) market. The forex market is operated by a global network of banks located in four major forex trading centers in different time zones: London, New York, Sydney and Tokyo. Since there is no central location, it is possible to trade forex 24 hours a day.
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There are three different types of forex markets:
- Spot forex market: is the physical exchange of a currency pair, which takes place at the exact point of settlement of the trade – i.e. immediately – or within a short period of time
- Forward forex market: in which a contract is agreed to buy or sell a specific amount of currency at a specific price, to settle it on a specific date in the future or within a range of future dates
- Future forex market: in which a contract is agreed to buy or sell a specific amount of a specific currency at a specific price and a specific date in the future. Unlike forward contracts, futures contracts are legally binding.
- Most traders who speculate on forex rates do not plan to take delivery of the currency itself, instead they make predictions of exchange rates in order to take advantage of price movements in the market.
What is the base currency?
trade forex currencies in the forex pair, while the second currency is called the quote currency. Forex trading always involves selling one currency in order to buy another, which is why they are listed in pairs – the price of a forex pair is the value of one unit of the base currency in the quote currency.
Each currency in the pair is listed as a three letter code, with the first two letters usually standing for the region, and the third for the currency itself. For example, GBP/USD is a currency pair that involves buying the British pound and selling the US dollar.
What moves the forex markets?
trade forex currencies consists of currencies from all over the world, which makes it difficult to predict exchange rates as there are many factors that may contribute to price movements. However, like most financial markets, forex is affected primarily by the strength of supply and the strength of demand, and here it is important to understand the influences that lead to price fluctuations.
Supply is controlled by central banks, who can announce measures that will greatly affect the price of their currency. Quantitative easing, for example, involves pumping more money into the economy and may cause its currency to drop in price.
Commercial banks as well as other investors tend to put their capital into economies with a strong outlook. Therefore, if there is positive news in the markets about a particular region, this will encourage investment and increase demand for the currency of that region.
Unless there is a parallel increase in the supply of the currency, trade forex currencies the mismatch between supply and demand will cause its price to rise. Likewise, negative news can cause investment to drop and currency price to drop. For this reason, currencies tend to reflect a view of the economic health of the region they represent.
Also, market sentiment in trade forex currencies, which is often a reaction to news, trade forex currencies may play a major role in increasing currency prices. If traders believe that a currency is heading in a certain direction, they will trade accordingly and may convince others to follow the same, causing demand to increase or decrease.