Sit tight and dive into forex trading thanks to this beginner-friendly guide.
The word forex is actually a portmanteau of two words: foreign (as in currency) and exchange. The process of foreign exchange converts one currency into another and this happens for many reasons such as commerce, trading and even tourism. In this article, we will give you a nice overview of forex trading to help you dive into this topic with all the information you need.
If you have always been interested in the world of forex trading but never had the chance to learn the basis of it, this is a great opportunity for you to do so and finally gain some ground knowledge on the matter, therefore, sit tight and dive into forex trading thanks to this beginner-friendly guide.
What is the forex market
Let’s begin by learning what the forex market is. That is the place where the currencies are traded. This is a very interesting aspect of this trading, as the marketplace used to exchange currencies is not a physical place but every transaction and exchange is actually done electronically and over the counter. This simply means that all transactions are done via computer networks among traders all around the world and don’t actually happen in one centralized place or through one centralized exchange.
This type of market never sleeps, literally. It is actually open 24 hours a day, five and a half days a week. Currencies are constantly traded in major financial centers such as Frankfurt, Hong Kong, New York, London, Paris, Singapore and many others across every time zone. The market begins in Tokyo and Hong Kong when the American one ends. As we said, it literally never sleeps, and it is highly active all the time.
How does the forex market work
Now that we have explained what the forex market is, we can deepen your understanding of how it actually works. First of all, it is important to know and remember that this type of market has to face several sudden changes in price quotes. It is the only trading market in the world that works nonstop, and because of this, it is useful to monitor it through some momentum indicators. There was a moment in the past when this type of market was actually dominated by institutional firms and large banks, which were working as mediators on behalf of clients, but this is no longer the case.
Nowadays, the forex market works in a more retail-oriented way, and traders and investors from different backgrounds and of different sizes all participate in it. This market operates through a series of connected trading terminals as well as computer networks. Yes, many participants are institutions and banks, but the decentralized nature of this trading market makes it possible for retail investors from all around the world to participate as well.
Types of markets
There are three main types of markets to take into consideration when thinking about forex trading. These markets are spot, forwards and futures markets. Firstly, the spot market is the largest of all three markets as it is the underlying asset on which the other two markets rely. Actually, when people talk about the forex market, they are actually referring to the spot market.
The spot market is where currencies are bought and sold based on their price and value. This is determined by supply and demand which are calculated based on different factors. A forward market, on the other hand, is a private agreement between two parties that is done to buy a currency at a future date and at a predetermined price.
A futures contract is a standardized agreement between two parties that is done to take delivery of a specific currency at a future date and for a predetermined price. In the futures market, these contracts are bought and sold based on several factors, such as the standard size and settlement date on public commodities markets.
What can you use this market for
This market can be used for a variety of reasons but two of the most important ones are earning the interest rate differential between two currencies and profiting from changes in the exchange rate. It goes without saying that to make the most of this market; you should have a good understanding of finance and the global market.
You can also use forex for hedging and speculation. Hedging means using the market, and thanks to its rates, to complete a transaction. Traders can buy or sell currencies in the forward or swap markets in advance and doing this can help them reduce losses and increase gains. Similarly, speculation takes into account aspects such as interest rates, trade flows, tourism and many others.
This was a simple and beginner-friendly guide to forex trading, and we hope it provided a clear overview of what this market is and how it works. Now, you have some more ground knowledge on this matter and you can find more in-depth resources on the matter.