FX trading also termed as foreign exchange or forex involves two currencies. It is the actively traded platform globally with an average volume of $5 trillion. The parties involved in this i.e, buyer and seller agree for a price and convert one currency to the other. Moreover, the parties can be from central banks, corporate office, or individuals. Did you travel to another country for whatever purpose it maybe? Yes! Then you might have done a transaction where you converted your country’s currency to the travelling currency.
For instance, imagine you are travelling from Europe to America, you have boarded a car from the airport to a restaurant you are staying. After getting down you need to pay the chauffeur. On the other hand, If you pay in pounds they will not accept so, at the airport itself there is a facility to convert your pounds to dollars. This makes your stay safe and runs all the financial transactions smoothly.
Though the forex trading is done for practical purposes mostly it’s undertaken for earning revenue and profits. Markedly, the conversions take place too frequently in a day the prices of some currencies are highly volatile. Additionally, this volatility is what attracts buyers and sellers. Moreover, with increased risk, there is an increase in profits. Approximately, 90% of this volume is through currency speculators based on intraday price changes.
How does the FX market work
You can trade currencies across different countries but the major centres being Sydney, Newyork, Tokyo, and London. Unlike stock and commodities, you can exchange the currencies electronically or over-the-counter. Besides, this type of trading is referred to as iForex.
It is quoted in currency pairs like USD/BRL(US dollars to Brazil real pair. It measures how much USD is worth against BRL. The base currency over here is USD and quote price or counter currency is BRL.
Comparatively, exchange rates fluctuations are determined through external economic factors like industrial production, inflation, geopolitical events etc. Indeed, these factors ultimately depend on whether you sell or buy the currency pair.
However, there are three types of the forex market
Spot forex or FX spot is an agreement between buyer and seller for an agreed price at the spot date or within a shorter time. Indeed, The rate at which the transaction is done is termed as a Spot exchange rate.
Forward forex is a market where a contract is signed for a future delivery date at a specified exchange price. The rate is termed as “forward rate”. They are generally negotiated for one, three and 12 months period after creating the contract. Moreover, if there is no government intervention then the price is fixed according to supply and demand. Forward contracts are hedged against foreign exchange risks.
Future forex is a market where a contract is signed to buy and sell the currencies at the future price and date. It is legally bound. Truly, these are traded electronically but there are other exchanges also like Euronext life, Intercontinental exchange and Tokyo financial exchange.
Difference between forwards and futures
- There is a difference between forwards and futures, The currencies in forwards are traded over-the-counter whereas forwards are generally done through centralized markets.
- The risk involved in future contracts ar zero while forwards carry counterparty risks.
- A forward exchange rate is fixed on the expiry date, whereas, future rates are fixed on the daily market rates.
- A future contract is exercised among investors while forwards are used by companies to protect upon currency volatility.
Base currency and quote currency
As you already know that in forex, the trading is done among currency pair. The first currency is basically termed as the base currency. It is the currency where the rates are quoted in a specific country. For example, in USD/CNH, the US dollar is a base currency. In this example, CNH is secondary or quote currency. For quote currency, there are direct and indirect quotes. However, the direct quote, the currency is a foreign currency whereas in the indirect quote the domestic currency is the quote currency.
For example, in USD/CAD, which is a direct quote, CAD is quote currency. Moreover, This pair signifies how many Canadian dollars to get one USD. More examples include
USD/CAD
USD/JPY
USD/CHF
Conversely, in EUR/USD, an indirect quote- USD is quote currency. How many USD is required to trade with a single Euro? Including
AUD/USD
EUR/USD
GBP/USD
Currency splits
To keep things in order, the currencies are divided into four different categories
Major pairs include seven currencies which are traded throughout the world. It includes AUD/USD
EUR/USD
USD/CAD
USD/JPY
USD/CHF and
GBP/USD
Minor pairs include currencies which are less traded and doesn’t include USDs. Besides, these are also termed as cross-currency pair. Moreover, the most traded currency pairs are Yen(JPY), Euro(EUR), and British pound(GBP).
Examples include
EUR/AUD
GBP/CAD
EUR/GBP
GBP/JPY
NZD/JPY
CHF/JPY
Exotics are a currency pair that includes the currency of a developed country or major currency and the others include a small or emerging country currency. To clarify, exotics are not easily traded as majors, minors and spreads for this is very high. For instance, exotics include:
USD/PLN
USD/HKD
GBP/PLN
GBP/ZAR
JPY/NOK
NZD/SGD
EUR/CZK
EUR/TRY
AUD/MXN
Regional pairs are the currencies which are divided according to a particular region like Australian and Scandinavia. For instance,
EUR/NOK
AUG/SGD and
AUD/NZD
Features of forex trading
They are liquid and dynamic markets
Traded 24-hours
Market transparency
Around 2,000 international dealers
Different platforms
OTC(over-the-counter) traded segment
Price movements
Anyone can trade
The amount to invest is left at your discretion
Minimum trading costs with leverage options
Understanding trading charts
There are basically 3 types of charts to know while you are trading.
Candlestick chart which is also referred to a Japanese candlestick chart. Moreover, it is mostly preferred by traders as it displays low, highs, closing and opening prices. Namely, the candlestick is shown as filled then the currency pair has been traded lowered at the close than open.
A bar chart also shows highs, lows, opening and closing. To emphasize, the top of the bar signifies the highest-paid and bottom is the lowest-paid price. Likewise, the bar chart is used to know the expansion and contractions of exchange rates.
A line chart is easily understood even by the beginners. Moreover, a line is drawn from one closing to the next price movements.
How to open a currency deal
Select the currency pair
Size of the deal
Direction
Close the deal and earn profits
It’s that simple.
Benefits of forex trading
A lot of flexibility to businessmen and traders
No restriction or limit on your investments.
Individual control
There are many options available. You can choose between spots and futures.
Quickly convert your assets into cash
Electronically trade the currencies with only a single click
To sum it up
For traders who have limited funds and prefer to have a day or swing trading in little amount, forex is always open. Besides, they can be profits in the long term with larger funds. In particular, you, believe it or not, currencies form prime importance in day-to-day activities. For instance, If you are staying in London and want to conduct business with the US company, you need to give entrepreneur US dollars and not the Pounds. The same goes for every imports and export business. That’s where the forex trading takes place and it takes place 24 hours and 5 days a week.
