Forex trading is a term used to describe people involved in the effective exchange of foreign currency, usually for the purpose of profit or financial gain. That could take the form of speculators, who want to buy or sell money for the purpose of profiting through the price movement of money; or it could be a fence aimed at protecting their accounts in the event of a breach of their financial position.
The term ‘forex trader’ can refer to each trader in the trading platform, a bank trader using their institutional platform, or hedgers who may be carrying their own risk or withdrawing that activity from the bank or financial manager to manage the risk on them.
The foreign exchange market, or forex (FX) for short, is a low-level market place that enables the buying and selling of various currencies. This happens over the counter (OTC) instead of the intermediate exchange.
Unbeknownst to you, you may already be participating in the foreign exchange market by ordering imported goods such as clothing or shoes, or, more likely, by buying foreign currency while on vacation. Traders can be drawn into forex for a number of reasons, including:
- FX market size
- Different types of trading currencies
- A different level of flexibility
- Low transaction costs
- Trading 24 hours during the week
TRADE OF PAIRS
One unique feature of the Forex market is the way prices are quoted. Because money is the foundation of a financial system, the only way to extract money is through other currencies. This creates a harmonious equation metrics that may sound confusing at first.
Forex trading in pairs gives the trader some flexibility, allowing the trader or investor to express his or her trading in the currency he or she feels most appropriate.
Let’s take the Euro for example, and let’s say the trader has good intentions for the European economy and thus would like to make long money. But – let’s say this investor is also strong in the US economy, but bearish on the UK economy. Yes, in this example, the investor is not forced to buy the Euro against the US Dollar (which could be a long trade of EUR / USD); and, instead, they can buy the Euro against the British Pound (long EUR / GBP goes).
This gives the investor or trader that extra flexibility, which allows them to avoid ‘missing’ the US Dollar to buy the Euro and, instead, allows them to buy the Euro while they are short of the British Pound.
CHURCH TRADE: BASE V / S COUNTER CURRENCIES
One important difference of the Forex rate is the meeting: The first currency listed in the rating list is known as the ‘basic’ currency of the two, and this is the quoted asset. The second coin is known as the ‘counter’, and this is the standard currency, or currency used to define the amount of the first coin for the two.
LET’S TAKE EUR / USD AS AN EXAMPLE
The Euro is the first currency on the scale, so the Euro will be the primary currency in the USD / EUR currency pair.
The US Dollar is the second largest currency, and this is the currency used by the EUR / USD quote to define the Euro value.
So, let’s say the EUR / USD average is 1.3000. That would mean 1 Euro costs $ 1.30. If the price goes up to $ 1.35 – then the Euro would go up in value and, basically, the US Dollar would go down in value.
If an investor was bearish on the Euro but strengthened the US Dollar, they could choose to ‘shorten’ the two, expecting prices to fall; after that they could ‘cover’ the trade by buying it at a lower price, and then put the difference in the pocket.
TRADE OF CHURCHES
In short, the foreign exchange market works like many other markets because it is driven by supply and demand. Using a basic example, if there is a strong demand for the US Dollar for European citizens holding Euros, they will exchange their Euros for Dollars. The value of the US dollar will rise while the value of the Euro will decline. Keep in mind that this transaction only affects the EUR / USD currency pair and will not, for example, cause the USD to depreciate in the Japanese Yen.