What Is Forex Trading?
The exchange of foreign currencies for other money is called forex trading, FX trading, or currency exchange. This can be done for a number of practical reasons such as travel abroad. Forex trading involves buying and selling foreign currencies that appear on the foreign exchange market (FX).
It is a worldwide market where all kinds of world currencies are bought and sold for one another, based on the idea of profiting from the exchange rates between them. The market stays open 24 hours a day, five days a week; it is pretty liquid and provides capabilities for relatively easy entrance and exit.
Forex trading has several advantages: high liquidity, access to all involved in business, small transactions for service charges, a leverage system, and the ability for market diversification.
But Forex traders also do their majority currency conversions for profit booking. In Forex trading, basically, Forex pairs are traded.
What Is A Forex Pair?
What is a Forex Pair? A forex pair is a combination of two currencies. For example, the US dollar and Japanese yen, the British pound and US dollar, the Euro and US dollar, etc. There is a particular format for denoting currency pairs.
What is Quote Currency?
For example, take the pair of British pound and US dollar, it would be written as GBP USD. The currency on the left hand side is known as the base currency and the one on the right is called a court currency when it’s in pairs.
In our pair, the British pound is the base currency and the US dollar is the court currency. The value of the base currency is always 1 and the court currency keeps changing frequently.
This tells us how much quantity of the court currency you need to buy a base currency. For example, if the GBP USD exchange rate is 1.28, then it means that one USD is equal to 1.28 GBP.
Understanding Forex Trading Basics
Forex Trading Lot Sizes
In Forex trading, transactions are made in standard units called lots, just like subscribing for shares in a public offer. Because price movement in Forex is usually small, the units are also quite large in size.
In Forex trading, a standard lot is 100,000 units of the base currency. To obtain vital information on how much of a particular currency is needed to buy another, traders can easily find the needful price for trading on foreign exchanges.
Currency Pair Pricing Explained
Currency pairs, for example, GBP/USD, represent the quantity of quote currency (USD) that is required to exchange for one unit of the base currency (GBP). In other words, buying a currency pair will imply an expectation in favor of improvement in the value of the base currency, so this is going long.
The selling of a currency pair helps indicate, therefore, an expected decline in the price of the base currency as compared to the quote currency.
Example of Forex Trading
GBP/USD Assume you believe the British pound will appreciate against the US dollar. In that scenario, you would go long the GBP/USD currency pair, entrusting that the value of the pound needed to purchase a pound in the future will have risen.
In the second scenario, in which you expect the pound will depreciate to the dollar, you would require less than a dollar to buy a pound. So, in this case, you would sell the GBP/USD currency pair.
What Spreads Are in Forex Trading?
One of the critical concepts in Forex trading is the spread: the difference between the buy and sell prices of a currency pair. For instance, the buy price of GBP/USD would be at 1.3428 while the selling price would be at 1.3424. A price increase above the buying price or a decrease below the selling price would result in a profit made from both the long (buy) and short (sell) positions.
Interpretation of Price Movements for Currency Pairs:
- Price Increase: In case the cost of the currency pair goes up, the base currency strengthens against the quote currency. For example, in this GBP/USD pair, when prices go up, more dollars are required to purchase a pound now than it was then, which means that the pound is more vital now than then.
- Price Decrease: On the other hand, when a currency pair price falls, the base currency is weakening. For example, if GBP/USD is decreasing, there is a weaker strength in the pound because one would need fewer numbers of dollars to buy one pound.
- Trading Strategies Based on Currency: Strength Traders would be able to follow these price movements and judge the strength of the base currency by going to lengths or shorts in it. Traders knowing these dynamics can make informed decisions while aiming at profitability in a highly dynamic Forex market.
Why Do Individuals Trade in Currency?
And it is not that the traders have only one way to do Forex trading. Forex traders can choose any trading style from scalping, day trading, swing trading, and position trading according to their trading terms.
Traders can also use hedging to reduce their risk exposure. Where they can hold some position at the counter of their main position so that if they have a loss in one trade, then they can offset that loss with the profit of the other trade. For hedging in the forex market, the best way is to use currency correlations.
Currency Correlations Like Euro USD and GBP USD, these two currency pairs are correlated and frequently show movement in the same direction. So, if one have held a long position in the Euro USD, then one can take a short position in the GBP USD currency pair for your protection in the falling market. And one can change these positions anytime because the forex market is open for 24 hours where global banks and market makers are constantly involved in currency conversion.
Due to this convenient timing of the forex market, one can enter and exit the market anytime. And if one see an opportunity, then one can take advantage of it. But to grab these opportunities, first one have to understand the variables