What Is Forex Trading?

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What Is Forex Trading?

How to Start Forex Trading


How would you like to make money while you sleep? If you’re wondering how to start forex trading, you might be interested to know that forex trading is one of the fastest-growing markets in the world. The value of currency pairs has jumped by more than 6 trillion US dollars since 2011, according to the World Bank.

 



What Is the Forex Market?


The foreign exchange market is where currencies are traded. Currencies are important because they enable purchase of goods and services locally and across borders. International currencies need to be exchanged to conduct foreign trade and business.
If you are living in the United States and want to buy cheese from France, then either you or the company from which you buy the cheese has to pay the French for the cheese in euros (EUR). This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars (USD) into euros.

The forex market is open 24 hours a day on weekdays, as there is always a major market open somewhere in the world. Every weekday, barring local holidays, Europe opens, followed by New York, then Sydney, and then Tokyo. London is open again before Tokyo closes. Many smaller markets open and close throughout the day and night. 

All these global markets vary in size, both in terms of their number of currency transactions and how many currency traders they have. That means each session in each market has different characteristics in their currency "pairs," or the comparison of the value of the home currency against another currency.


An Overview of Forex Markets


The FX market is where currencies are traded. It is the only truly continuous and nonstop trading market in the world. In the past, the forex market was dominated by institutional firms and large banks, which acted on behalf of clients. But it has become more retail-oriented in recent years, and traders and investors of many holding sizes have begun participating in it.
An interesting aspect of world forex markets is that there are no physical buildings that function as trading venues for the markets. Instead, it is a series of connections made through trading terminals and computer networks. Participants in this market are institutions, investment banks, commercial banks, and retail investors.


Spot market


Forex trading in the spot market has always been the largest because it trades in the biggest “underlying” real asset for the forwards and futures markets. Previously, volumes in the forwards and futures markets surpassed those of the spot markets. However, the trading volumes for forex spot markets received a boost with the advent of electronic trading and the proliferation of forex brokers.
Forwards and futures markets
A forward contract is a private agreement between two parties to buy a currency at a future date and at a predetermined price in the OTC markets. A futures contract is a standardized agreement between two parties to take delivery of a currency at a future date and at a predetermined price.
Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead, they deal in contracts that represent claims to a certain currency type, a specific price per unit, and a future date for settlement.


Forex for Hedging


Companies doing business in foreign countries are at risk due to fluctuations in currency values when they buy or sell goods and services outside of their domestic market. Foreign exchange markets provide a way to hedge currency risk by fixing a rate at which the transaction will be completed.

To accomplish this, a trader can buy or sell currencies in the forward or swap markets in advance, which locks in an exchange rate.


Forex for Speculation


Factors like interest rates, trade flows, tourism, economic strength, and geopolitical risk affect supply and demand for currencies, creating daily volatility in the forex markets. An opportunity exists to profit from changes that may increase or reduce one currency’s value compared to another. A forecast that one currency will weaken is essentially the same as assuming that the other currency in the pair will strengthen because currencies are traded as pairs.


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