Trading Forex and how it works
Foreign Exchange or Forex is a form of trading that focuses on converting from one type of currency into another and is known as one of the most traded markets in the globe. Trading Forex on the daily average of $5 trillion worldwide. But a lot of people out there, although interested in trading, have not been able to surmise how it works. We have broken down some of the inner workings of Forex and how it works to give you a basic understanding before taking the plunge.
In a nutshell, Foreign Exchange or Forex is made up of buyers and sellers that are transferring specific currencies between each other based on an agreed price. Whether its individual entities or companies and even central banks, are the ones who convert these currencies to each other. A simple example of this is your time going into a different country and having to convert your money to that country’s currency is already a form of a forex transaction.
Aiming to earning a profit, a lot of people have entered Trading Forex even if most have made transactions for the sole purpose of utility rather than entering the market actively. Everyday, currencies are being converted which enables the movement of the price of specific currencies to become very volatile.
How does the Market work?
Cmpared to commodities and shares, Forex does not necessarily happen directly between the two trading parties and is run by an existing world wide network or banks that exist in the four major trading centers from different time zones. These are Tokyo, Sydney, New York and London and since there is no central location, a trader may very well engage in trading 24 hours a day.
As a trader, you may need to look into the kinds of Forex Markets:
Spot Forex Market – This is the actual exchange of currency pairs. Taken from “on the spot” referring to the moment where the exact place the trade was settled, connotes that this type of Forex Market focuses on trades made in a specifically quicker time.
Forward Forex Market – Is an agreement made where buying or selling of a set amount of currency at a specific price, is settled at a specific date in the future or future dates that are within a range set
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Future Forex Market – Is an agreement where the buyer and seller sets a specific amount of currency based on a set price and date in the future. However, unlike forwards, futures contracts are legally binding agreements.
So how does it work?
There are definitely a lot of ways on how you can trade forex but will pretty much end up a certain way. You trade forex and make transactions by buying a specific currency and you sell another. Most transactions in this form of trading are made through a forex broker but due to the online trading rise, you as a trader are able to take advantage of the price movements in the forex market by using derivatives like CFD.
Leveraged products, CFDs enable you to hold a specific position by shelling out for only a small amount versus the full value of your trade. Compared to non-leveraged products, you do not exactly take the ownership of an asset but instead, take a position on whether you project that the market will fall or rise in value. AS you engage in leveraged products, you are able to increase your chances of making bigger gains. However, this can also be true for bigger losses as the market moves against your predictions.