(Newswire.net — November 23, 2021) — One of the largest financial markets in the world, the foreign exchange (forex) sees around $6 trillion worth of trades every day, which is significantly more than other markets. The sheer volume of major currencies being traded means that the market is highly liquid.
It also sees a high level of volatility, which provides traders with opportunities to profit and take advantage of the short-term fluctuations in price. However, it does come with its risks, just like with any investment.
If you’re new to the world of forex trading, let us explain more about one of the most popular markets featured in many investors’ portfolios.
Forex trading explained
Online CFD trading platform Skilling defines forex trading as:
“…a global marketplace where currencies are traded. National currencies are exchanged against one another worldwide… making it the largest financial market in the world.
“For this reason, forex trading is one of the most actively traded markets in the world, since it relates to any conversion of one national currency into another.”
For forex traders, there’s potential to profit from the exchange rate between a currency pair, and the timing of their position in the market.
There’s no central exchange for forex trading, which differs from other markets such as stocks and commodities. The currencies are traded via a global network of banks, dealers, and financial brokers.
Most trades take place on the spot, on an over-the-counter market. However, currencies can also be traded using future exchanges. This involves buying the assets for a set price on a specified date in the future. Many retail and institutional traders actively engage in the currency futures markets.
Another way to trade forex is through a financial derivative such as contracts for difference (CFDs). These are contracts that act as an agreement between the broker and trader, allowing the trader to speculate on the price movement of a currency pair, without owning the underlying asset.
The value of a currency pair can be impacted by a variety of factors. One of which is the volume of currency that is bought and sold every day, which can make some currencies extremely volatile.
Currencies are also heavily influenced by the strength of a country’s economy. Therefore, the forex market can be affected by political events, recessions, and macroeconomic data like inflation and interest rates.
The volatile nature of the forex market is one of the main reasons that many traders include currencies in their investment portfolio, as there is an opportunity for high profits, alongside the increasing risk.
How does forex trading work?
Forex prices are always quoted in currency pairs. This consists of the base currency – the first currency – and the quote currency – the second currency. They’re represented by the International Organization for Standardization (ISO) three-letter alphabetic codes.
For example, if you were to invest in the currency pair EUR/USD, the base currency would be Euros and the quoted currency would be US dollars. This means that you would buy in Euros and sell in US dollars.
There are many currencies that can be traded in the forex market, but they can be split into four main categories:
- Major
- Minor
- Crosses
- Exotic
According to the European Securities and Markets Authority (ESMA), major forex pairs are currency pairs comprising of any of the two following currencies:
- US Dollar (USD)
- Euro (EUR)
- Japanese Yen (JPY)
- Pound Sterling (GBP)
- Canadian Dollar (CAD)
- Swiss Franc (CHF)
Exotic pairs refer to the currencies from emerging economies that can be paired with each other or a major currency. These can include the Turkish Lira (TRY) or the Norwegian Krone (NOK), for example.
—
Before investing in the forex market, it’s important to understand how to read a currency pair correctly. You should also carry out extensive research to gain a full understanding of all the factors that can affect the value of the currency pairs.