Forex Trading | Foreign Exchange Market | How the Forex Market Work
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What is Forex Trading?
Forex Trading is simply the trading of currencies. Trading in currency is having direct access to trading various types of foreign currency. In time past, trading in foreign currency was limited to large banks corporations and institutional business entities. However, recent technological developments have given room for small traders to benefit from trading on the Forex market simply by trading in different online trading platforms.
The Foreign Exchange Market
The foreign exchange market is the largest and the oldest financial market in the world, where forex trading is done. This market having a trading daily volume of more than $5.3 trillion. It is also simply called the currency market or FX market. It is the largest and most liquid market in the world. Currencies are sold 24 hours a day via the interbank foreign exchange market. Forex trading in the FOREX market never stops, it is never on “Phase Mode”.
In time past, the forex interbank market was not available to small speculators due to a large number of transactions and the strict financial requirements. The main trader were banks, large currency traders and sometimes even speculators. Only they could benefit from the fantastic liquidity of the foreign exchange market and the strong trend of many large global exchange rates.
Today, thanks to innovation in technology and FX market brokers which have been able to break these higher interbank units into smaller units which are now offered to small traders, such as you and I. Thus we now have the opportunity to partake in this market; been able to buy or sell some of these smaller units. These Fx market brokers offer traders of all sizes, to both individual or smaller companies, the opportunity to trade the same rates and price movements as the largest players who dominate the market.
The Four Main Currency Pairs
World currencies have a floating exchange rate and are always exchanged in pairs. Approximately 85% of all daily transactions include trade in major currencies. The four main currency pairs are usually used for investment purposes.
The Euro against the US dollar (EUR / USD).
The US dollar against the Japanese yen (USD / JPY).
The British pound against the US dollar (GBP / USD) and
The US dollar against the Swiss franc (USD / CHF).
How does the Forex Market Work
Transactions on the FOREX market are carried out by dealers from leading FOREX brokers or listed companies. FOREX is an essential part of the global market, trades are constantly going on in this market, retailers in Europe exchange currencies with their Japanese counterparts.
So the FOREX market operates 24 hours a day, and dealers from large institutions work on three different shifts 24 hours a day, 7 days a week. Customers can place take-profit and stop-loss orders with brokers at any given time.
If you think that one currency can be valued relative higher to another currency, you can swap the second currency for the first currency and ‘stay’ i.e wait for it to appreciate. If everything goes according to plan, you will the be able to do a re-swap; this means you can swap the first currency with the other currency and make a profit from it. When it comes to trading in currency dividends are not paid on currency.
Price movements on the FOREX market are runs smoothly and without any gaps, which appear almost daily on the stock exchange. The daily turnover on the FOREX market is approximately USD 1.2 trillion, so a new investor can easily enter and leave without having any issues.
How Money is Made on Forex Market
To make money In FOREX trading. First, you register with one of the brokerage platforms, next, let’s say you decide to buy 1,000 euros against the US dollar. The EUR / USD exchange rate, where you can BUY now, is 1.2500, so you pay 1 250 USD.
Then there is the EUR / USD exchange rate, for which you can SELL USD for USD 1,300. You are selling € 1,000 and you get $ 1,350. After starting with $ 1,250 you now have $ 1,350 – you earned $ 100. Alternatively, the EUR / USD exchange rate, for which you can SELL 1.1500 euros. You sell 1,000 € and you get $ 1,150. After starting with $ 1,250 you now have $ 1,150 – you lost $ 100. That’s how you can create or lose money on the FOREX market.