What is Forex Trading and how does it work

 

What is forex trading and how does it work?

First of all, you need to know that the Foreign Exchange(Forex) Market is the largest market in the world. Over $3 trillion is traded per day.

It is run electronically across a network of banks 24 hours a day and 5 days a week(weekdays) according to your time zone.

It involves exchange of one currency for another. For example, selling the Euro to get the American Dollar.

Secondly, different currencies have different values per unit. For example, one American Dollar has more buying power(can buy more goods/services) than one Japanese Yen.

Where does active forex trading come in?

Currencies fluctuate in value against each other. For example, the American Dollar can rise in value against the Euro

This may be due to:

1. Fundamental factors such as inflation, interest and employment rates in countries/country that use those specific currencies.(Main cause)

2. Random currency exchanges done my thousands of people like travelers or business people who want to buy goods from a country that does not use the currency that they have in hand.

How does those factors stated cause fluctuation in the value of a specific pair of currency?

Let’s say America is doing better economically compared to Europe. For example, the inflation rate is low.

Investment institutions like banks and hedge funds will start to sell the Euros they had in their accounts to get the more stable American Dollar.

Due to the basic rule of supply and demand the Dollar will tend to rise in value against the Euro, because the investors will be willing to pay more Euros to get Dollars from other investment institutions.

How often do currencies fluctuate in value against each other?

Fluctuation during the day is commonly known as volatility.

It happens almost every time when the Forex Market is open but is higher when the four main global trading centers are open(during their respective day time).

These are:

London in the UK

New York City in the USA

Tokyo in Japan

Sydney in Australia

This is because lots of transactions occur in these cities which involve large units of currency.

Note that there is a time when the London session overlaps the New York session.

Volatility is highest at this time.

This occurs between 12 A.M. GMT to 4 P.M. GMT.

GMT is the abbreviation for Greenwich Mean Time.

Day traders like to trade at this time due to the increased volatility.

Which are the main currencies traded by traders

They are 8 in number.

They are denoted by three-letter codes.

They are:

 

1. USD(US Dollar)
2. EUR(Euro)
3. JPY(Japanese Yen)
4. GBP(British Pound)
5. AUD(Australian dollar)
6. NZD(New Zealand Dollar)
7. CAD(Canadian Dollar)
8. CHF(Swiss Franc)

Doing the actual trading

As you have seen, currencies rise and fall in value against each other, so they are traded in form of a currency pair. For example, the Euro against the US dollar which is denoted as EUR/USD.