Forex – The Trading of Currencies

Forex – The Trading of Currencies

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What is Forex?

Forex is also known as foreign exchange or FX trading. The conversion of one currency into another is called Forex. It is one of the most actively traded markets in the world. Forex is a decentralized global market where the world’s currencies trade. On an average daily trading volume of forex is more than $5 trillion so this market is also known as the world largest market. It is bigger than the world’s combined stock market. It involves traders, investors, institutions, and banks and they buy and sell world currencies. Trading is conducted over the interbank market, an online channel through which currencies are traded 24 hours a day; five days a week exclude Saturday and Sunday.

How do currency markets work?

If you’ve ever traveled overseas, you’ve made a forex transaction (currency exchange). Forex is a network of buyers and sellers who transfer currency between each other at an agreed price, in an over-the-counter (OTC) market. There is no need for any exchange. The forex market is spread across four major forex trading centers in different time zones: London, New York, Sydney, and Tokyo. Because there is no central location, you can trade forex 24 hours a day.

Types of Forex market:

There are three types of forex market.

  1. Spot forex market: As its name shows that a physical currency exchange which takes place on the spot is called Spot forex market. It means the exchange settled at the exact point of trade within a short period of time.
  2. Forward forex market: It is agreed contract 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 is Forward forex market.
  3. Future forex market: Future forex market is also agreed contract to buy or sell a set amount of a given currency at a set price and date in the future. Unlike Forward forex market, a futures contract is legally binding.

What is the currency pairs?

There are seven Major currency pairs on the forex market which are divided into three categories.

  1. Major Pairs: – There are seven main currencies that makeup 80% of global forex trading. Major pairs are the most commonly traded which typically have low volatility and high liquidity. It includes EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, and AUD/USD.
  2. Minor Pairs: – It also called Cross currency pairs which do not include the US dollar. They are typically less liquid and more volatile than Major currency pairs. It includes EUR/GBP, EUR/CHF, GBP/JPY.
  3. Exotic Pairs: – A major currency paired with emerging or smaller economies is called Exotic pairs. Exotic pairs are much riskier and are more sensitive to sudden shifts in political and financial developments. They are less liquid, more volatile, and more susceptible to manipulation. It includes USD/PLN (US dollar vs Polish zloty), GBP/MXN (Sterling vs Mexican peso), EUR/CZK.

How does forex trading work?

Trading is a process of buying and selling currencies in order to make a profit so you will work with two currencies at a time. The price of one currency is linked to the price of another currency. The base currency is the first currency appearing in a currency pair quotation, followed the quote currency. The difference between both the currencies is your profit.

Each currency in the pair is listed as a three-letter code. The first two letters stand for the region and one standing for the currency itself. For example, GBP/USD is a currency pair that involves buying the Great British pound and selling the US dollar.

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