What is forex trading?
Discover the opportunities available in the market that never sleeps
Forex for beginners
Forex trading, otherwise known as currency or FX trading, involves trading currencies and speculating on the currency price fluctuations over a given period of time. Traders buy or sell one currency against another. As a trader, you will gain from the changes in exchange rates between a currency pair. You speculate whether the value of a currency, for example the Euro, will rise or fall in relation to another currency like the US dollar.
The forex market contains the largest volume of trading in the world, with more than $5 trillion USD worth of currencies traded on a daily basis. For this reason, the market is very dynamic and highly liquid. Because of this liquidity, currency rates can quickly change in reaction to market news, political situations and key economic events. As the currency markets are very much a reflection of the political and economic events tied to various regions, forex traders can take advantage of these market influences by trading.
How forex trading works
A forex position is always quoted in currency pairs, GBP/USD (also known as cable) for example. To profit, you need to look at the fluctuations in the two currencies’ exchange rates. The first currency is called the base currency. Forex trades speculate on whether it will improve or decline against the quote currency.
When you open a trading position, you are speculating on the direction in which the market is going to move. You either open a buying (long) or selling (short) position, depending on what direction you think the value of the currency will go. Price movements in the forex market are affected by the strengthening and weakening of the currencies’ value.
Forex trading is margined or leveraged. Simply put, this means that when trading, you can invest only a small amount of money, but you can trade a much bigger amount of money through leverage. If your money is leveraged, whatever gains or losses incurred are also magnified. That’s why it is important to learn how to properly manage the risks.
The currency pairs
There are hundreds of currencies around the globe, which are often classified under three main groups, based on liquidity and popularity. These are the majors, minors and exotics.
Majors – The most liquid or most actively traded currencies.
Majors account for 85% of the total volume traded in forex markets. At ThinkMarkets, our spreads on majors are tighter than the spreads of minor or less traded currency pairs.
Minors – Not as heavily traded like the majors and often more volatile.
Spreads for minor pairs are also typically wider because of the medium sized market liquidity compared to the major pairs.
Exotics – Exotic currency pairs are traded more rarely.
Because of their low trading volume, the currencies are not considered liquid. They tend to be more costly to trade because of the wider spreads and traders add them to their trading due to their higher risk/reward profile.
Forces that move the forex markets
Similar to most other financial markets, supply and demand primarily control the price movements in the forex markets. Banks and other big investors want to pour in capital into economies with strong potentials.
If good news about a particular country reaches the markets, investors would be encouraged to put more money, increasing the demand for the country’s currency.
If there is no corresponding increase in the currency’s supply, the higher demand will trigger the price to rise. Likewise, bad news can discourage investors from putting money. This will, in turn, cause the price of the currency to drop. It can be said that a country’s currency reflects the economic condition of the country it represents.
Now that you have a good grasp of the basics of forex trading, it is time to learn
- How to trade forex
Losses can exceed deposits.