How To Start Forex Trading – Learn more about forex trading, from how the FX market works and what drives the exchange rate, to different trading strategies and tools. Read on to learn how to trade Forex through CFDs.
Forex trading is the process of buying and selling international currencies with the aim of profiting from the exchange rate fluctuations of different currencies.
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The word “forex” stands for foreign currency. The forex market allows the trading of fiat currencies of different countries with each other. For example, exchange the British Pound against the US Dollar (GBP/USD).
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What is Forex trading and how does it work? Forex or foreign exchange – often referred to as FX – is a currency pair that tries to take advantage of exchange rate fluctuations.
While assets such as stocks and commodities are traded through centrally regulated exchanges, currencies are bought and sold over the counter (OTC) – meaning that trades are made primarily on the institutional side of exchange trading centers around the world. This is called the interbank market.
The largest and most liquid of these FX trading centers are London and New York. Tokyo, Hong Kong, Frankfurt and Singapore are also important centers of currency trading.
Forex is the world’s fastest growing market by trading volume and the largest by value, with approximately $7 trillion traded daily.
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Due to the size of the international market, forex transactions are carried out 24 hours a day, except on weekends, and the exchange rate of all world currencies is determined.
How does forex trading work? Forex investors trade currency pairs—sometimes called crosses—on pairs that don’t include the U.S. dollar—assessing when one currency may rise against another.
Forex trading involves buying one currency while selling another. Traders try to make a reasonable profit by selling currency at a higher price than when they bought it. Currency pairs have a base currency and a value currency. The exchange rate indicates how much of the quoted currency is needed to buy one unit of the base currency.
Each currency is represented by a three-letter code, the first two letters usually indicate the country and the third is the currency – for example USD for US Dollars, CAD for Canadian Dollars and NOK for Norwegian Krone. There are exceptions such as Euro to Euro and MXN to Mexican Peso.
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Common pairs traded in the foreign exchange market are the Euro against the US Dollar (EUR/USD), the US Dollar against the Japanese Yen (USD/JPY) and the British Pound against the US Dollar ( GBP/USD).
A forex trader buys and sells a pair when they expect the price to change. For example, if a trader believes that the euro will rise against the dollar – perhaps because of strong economic data for the euro – they can take a long position in the currency EUR / USD. If they expect the euro to fall, they can short the currency pair.
Before you learn how to start forex trading, it is useful to know some common terms used by traders. Here is a simple glossary of some of the terms you will come across:
Base currency – the first currency shown in a currency pair – USD/EUR The US dollar is the base currency
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Basic point – it is equal to 1/100 of 1% or 0.01% – or 0.0001 of the value of the currency pair. It is often called “pipe”.
The counter-currency – the second currency of a currency pair – is the counter-currency to USD/EUR
Day Trading – Entering and exiting a forex trade on the same day. This is a common strategy used in CFD trading platforms
Dollar Index – A measure of the strength of the US currency against a basket of other currencies including the euro, pound, and yen. Its symbol is DXY
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Leverage – This allows the trader to open positions that are much larger than his previous sales can cover. This means that you can significantly increase your profit by winning trades, but at the risk of losing more than your initial deposit. Pay attention to the risk warnings of trading sites and trading programs that offer powerful trading.
Liquidity – A highly liquid market has sufficient trading volume to ensure smooth price movement. Illiquid markets have low levels of trading activity and can lead to price volatility
Lot – Forex is traded based on units of currency. The standard size is 100,000 units, although you can trade as low as 10,000 units and as low as 1,000 units.
Margin – Margin is related to leverage and represents the minimum amount of cash you must deposit in order to trade at your assigned leverage.
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Margin Call – When your open position moves, your broker will issue a margin call to pay more to cover your margin.
Pip – stands for “interest rate” and is the minimum amount of money a pair can exchange. For the quoted currency pair, one pip will be 0.0001.
Spread – This is the difference between the bid – or sell – price and the ask – or buy – price of two currencies.
FX rates fluctuate constantly throughout the day, based on whether one currency is needed for another. Since the forex market covers currencies from all over the world, there are many factors that can lead the way for different partners based on the value they see to pay or invest in products and services.
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If you want to learn forex trading, here are some factors that can affect the value of the currency that you should know about.
The value of a country’s currency is largely determined by the health of its economy. Foreign exchange markets react to the release of key economic data, giving a picture of how a country’s economy is doing and how it compares to other countries.
Gross domestic product (GDP), which reflects the value of all goods and services produced by a country in a given period, is one of the most important indicators of a country’s economic performance.
The value of currencies also reacts to news and political events both domestically and internationally. As the world’s reserve currency, the US dollar is considered a safe haven and rises in value in times of economic uncertainty and political instability.
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An example of the impact a political event can have on the Russian ruble, which has lost a third of its value in the two weeks following Russia’s invasion of Ukraine and Western sanctions. The ruble later reversed course and quickly returned to pre-invasion levels and more amid rising oil and gas prices.
The country’s monetary policy stance in response to inflation is an important driver because higher interest rates attract investors to get higher returns on their money. For this reason, foreign exchange rates move towards the currency with the highest interest rate.
Product prices move in different directions depending on whether countries are net importers or net exporters. Currencies of countries that export large amounts of commodities, such as the Australian dollar, the New Zealand dollar and the Canadian dollar, are called commodity currencies.
If you are interested in how to trade forex, there are different tools you can use depending on your trading strategy and market forecasting.
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The majority of FX transactions by large institutions are conducted on the exchange market, often amounting to hundreds of millions of dollars at a time. But with the rise of online forex trading sites – as opposed to physical exchanges – retail traders can now participate in currency markets as well.
Comprising $2 trillion of the total FX market, a spot transaction is a direct agreement between two counterparties to buy one currency against the sale of another at an agreed price on a settlement date.
Individual investors do not participate in the cash market. Unlike other instruments such as futures, options, and exchange-traded funds (ETFs), which are traded through a centralized exchange, forex cash contracts are traded over-the-counter (OTC) contracts. between their peers.
The main market in the forex market is the “brokerage” market, where brokers trade with each other. This market is also called the interbank market because banks are the main traders. The inter-vendor market is only available to institutions such as banks, insurance companies, pension funds and large companies that trade in large quantities.
What Is Forex Trading And How Does It Work?
Options are financial instruments that give the buyer the option to buy/sell an asset at a specified price on a specified expiration date. If a forex trader buys an option, he can buy a currency at a specified exchange rate on the expiration date.
Unlike forex contracts, options and futures are traded on exchanges. However, while the forex market trades around the clock, trading opportunities are limited to the working hours of the exchange, and the margin is less than the spot and futures markets.
Forex futures were created by the Chicago Mercantile Exchange (CME) in 1972 and continue to be traded on the exchange.
Futures contracts are contracts that oblige a trader to buy or sell an asset
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