Trading is to invest in financial instruments and earn profits. In forex trading, investors trade in currency pairs to make money. There are various currency pairs like major, minor or exotic that traders can select from.
Traders invest in the forex market with a trading account. They easily open their account and trade in the currencies. They have tools, indicators, charts and other advanced facilities to analyse the market.
But, how does forex trading work? To understand it, we have a brief analysis of forex trading.
What is the Forex Market?
Forex is the foreign exchange market. It allows traders to invest in currencies of various countries to make money. The investments are in currency pairs; anyone can trade in these currencies.
However, the forex market is volatile and liquid. Therefore, traders must be careful with their investments to have good returns.
What is Forex Trading?
Forex trading is the process of investing or speculating on currencies. They trade in the currency pairs to have the potential profits from the market opportunities. The trade is in currency pairs, a continuous buying and selling.
Traders invest in currency pairs to earn from the price change of currency pairs. Of course, the rise and fall in value helps them get profits, but it should favour traders’ decisions.
There is a network of buyers and sellers in the market. They transfer the currency to each other to find the opportunity and have profits.
Any individual, company or trader can invest in the forex market.
How does Forex Trading Work?
The forex market is decentralised. The trading is directly and not through the exchanges.
Instead, the two parties trade in an over-the-counter market. The currency market works by the global banks spread across the four major centres.
These trade in London, New York, Sydney and Tokyo time zones. It has no central location, and traders can invest for 24 hours.
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The forex market is available in three different forex markets:
- Spot market: The spot forex market is the physical exchange of currency pairs. Traders make instant payments and have ownership of the currency pair. The trade period is short, and the payment is within one to two business days.
- Forward market: Forward market trades in the future with no obligation to execute the trade. Forex traders use the trading market to buy and sell currency pairs with a set price and time on a future date.
- Futures market: Futures market is a contract between the two trading parties of the forex market. It allows traders to trade in currency pairs on a future date with price and time fixed. It sounds similar to forward but what makes it different is its obligation to trade.
Traders can select these three forex markets to trade in currency pairs.
Base and Quote Price
The forex market has two significant components that help to analyse the price. First, the base and the quoted price give traders their actual value for the period.
The forex market’s base price is the currency pair’s upper currency. We know that forex trading execution is in currency pairs. The upper currency is known as the base currency. The value of a base currency is the base price.
The quote price is the value of the lower currency of the currency pair. Traders use the quote currency’s price to analyse the base currency’s value.
It is so because the base currency value is on the basis of the quote currency.
For example, EUR/USD is a currency pair. Here the base currency is the EUR, and the quote currency is USD. Hence, the price of EUR will be the base price, and the value of USD will be the quote price.
Forex Currency Pairs
Also, the forex pairs are of different types:
- Major forex pairs
- Minor forex pairs
- Exotic forex pairs
The major forex pairs are the high-volume forex pairs. About 80% of trading is in these pairs. For example, EUR/USD and USD/INR.
The minor currency pairs are the forex pairs with less frequency in the market. Examples are EUR/GBP and EUR/CHF.
The exotic currency pairs are different from the above two. These are currency pairs with one developing nation’s currency and another of a developed nation—for example, GBP/MXN and USD/PLN.
Forex trading is an attractive market. Several investors trade in the currency pairs to invest and make profits. However, the market is volatile. Therefore, traders need to understand its working and concepts before investing.
The article gives a brief analysis of the significant market factors. Then, it defines the forex market, forex trading and how the market trading works. Traders who understand these elements can make good profits from their investments.