What is forex trading and how it works?

Forex also known as Foreign Exchange, is a decentralized global market in which currencies of entire world are being traded. The Foreign Exchange market is known to be the largest yet most liquid market as well, because of worldwide reach of trade, finance and commerce. The average forex trading volume is exceeding $5 trillion per day.  Let’s see What is forex trading and how it works?

But what does Forex trading mean to you? Let’s have a closer look on what is forex trading and how it actually works. This will let you unveil some exciting opportunities that other investment products don’t offer. 

What is Forex Trading?

Forex can be explained as a network of sellers and buyers. The network transfers currencies between each other at an agreed price. It is the means through which central banks and companies used to convert one currency into other as per their requirements. 

Basically, when someone considers trading at forex, they will buy and sell a currency pair in an effort to earn some profit. The profit and loss here are made by the potential increase or decline in the prices of that pair. 

Even though a lot of foreign currency exchanges are done for some practical purposes. However, the majority of trading is undertaken in forex with the aim to earn profit. The currency amount converted everyday can make some currencies’ price movement extremely volatile. 

And it is the volatility that makes foreign exchangetrading attractive for traders. 

How does forex trading work?

Unlike commodities or shares, forex trading takes place over the counter market, between two parties directly. As the foreign exchange market is run by a network of banks globally that’s spread across multiple forex trading centers. Due to different time zones of these forex trading centers, anyone can trade forex 24/7. 

There are three different ways to trade forex:

The spot market, in which the currency pairs are swapped. Here exchange rates are determined in real-time based on supply and demand. 

The Forward market, in which traders enter into a binding contract and lock an exchange rate for an agreed currency amount. The exchange will be done on a future date. 

The Futures market, in which traders can go with a standardized contract to sell or buy pre-determined currency amounts at a future date. This is not done privately, unlike to the forward market. 

The exchange rates in the foreign exchange market are usually determined by the spot market, which is largest among others. This is also a market where the majority of forex trading is being executed. 

Due to technological evolution in the past decades, anyone with a working internet and computer can start trading. This easier accessibility has attracted numerous enthusiastic traders. Consequently, participation in forex trading is higher than ever. 

Final Thoughts 

Even though the market is pretty easier to access, the dynamics of the markets are complex. However, if you are looking to start trading, it is always recommended to gain familiarity with this trading type.

References

Investopedia, Forbes, The Balance.