Forex trading is growing to attract more investors with the market having an average of $5 trillion daily globally. Here, we explain what Forex trading is and how it works.
What Is Forex Trading?
The foreign exchange market, which is usually known as “forex” or “FX,” is the largest financial market in the world. It simply means the change of one currency into another for example USD into EUROs.
Foreign exchange trading can also be defined as a network of traders, buying and selling foreign exchange in pairs at a price negotiated and agreed. Traders can be corporations, financial institutions, governments as well as individuals.
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There are also Forex brokers who assist in facilitating Forex trade more so for individuals. Financial entities such as banks offer brokerage services. There are however broker companies that work online such as Alpari, offering Forex trading options to their clients.
This leading Forex trading broker online has different types of accounts that clients can use for Forex trading.
How It Works
Initially, people only carried out foreign exchange when they wanted to change their currency to another either for traveling or business transaction purposes.
Over time, however, foreign exchange has slowly grown into one of the most lucrative trading markets across the globe. Forex trading, unlike stock shares and cryptocurrencies, does not take place in exchanges but rather directly between two parties.
Today, the Forex market is one of the largest in the world attracting millions of investors. So how exactly do the traders make money in Forex trading? It can be over the counter (OTC) or online run by global networks of financial institutions such as banks.
The value of a particular currency is the same all across the globe meaning if the USD/euro is trading at 0.92 in New York, it will trade the same in Nigeria, London, Australia, South Africa as well as in other regions.
Forex trading is not constant but rather quite volatile with the value of currencies changing by the minute. The fact that the USD/Euro may trade at 0.92 in the morning and by afternoon it trades at 0.96 is what makes Forex trading profitable.
The difference in value is how Forex traders make their money. The same difference can also lead to losses and the changes in value are determined by various factors affecting the economy of the home country of that currency.
Currency Pairs
When an investor wants to get into Forex trading, one of the important things to learn and understand is how currency pairs work. Technically, Forex trading takes place by betting against currency pairs. These are the trading values of the two currencies. For example, USD/EURO currency pair means the USD is the base and the EURO is the Counter.
This means that the price stated represents how much one US dollar costs in EUROs. When trading, there will be two prices stated buying price and selling price concerning the first currency in the pair. The spread in Forex trading refers to the difference between the two prices.
The Trading
When it comes to foreign exchange, the change in the spread is an opportunity to make money. Traders predict an increase of one currency against the other and either sell or buy. For example in the currency pair USD/EURO, if one anticipates an increase in the value of USD, then in this currency pair, they buy. If the anticipation is that the value will drop, they sell the USD/EURO. The spread is measured in pips and when the trade happens and changes take place, traders cover the spread and make either a profit or a loss.
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Traders can set aside some finances to trade in the Forex markets and due to time zone differences, traders can trade 24 hours for five days a week. The trade requires one to do good research and to always be on the know about the factors affecting different economies to identify the best currency pairs to trade-in.
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