Forex trading is one of the most lucrative and dynamic businesses in the world. Millions of investors and traders from all across the world are engaged in forex trading. However, there are many aspiring investors or traders who do not know what forex trading is and how it does work. If you are one of those people, seeking to make money trading forex in international financial markets, then understanding what is forex trading is essential.
What Is Forex Trading?
Forex trading is trading currencies from different countries in the world against each other. Forex is the acronym of Foreign Exchange. Forex trading generates the largest daily turnover in the world. The money traded in forex markets daily is more than $2 trillion. Here are some important facts about forex trading which is also known as FX:
· Forex market is the buying of one country’s currency and the selling of another country’s currency.
· Forex market is open 24 hours a day.
· Trading is Closed on the weekends.
· Forex market is usually devoted to the world’s major currencies, such as the US Dollar (USD), Euro (EUR), British Pound (GBP), Australian Dollar (AUD), Japanese Yen (JPY) and Canadian Dollar (CAD).
· When buying one nation’s currency and selling another nation’s currency, the units of currency are always expressed in pairs, such as GBP/USD.
How Does Forex Trading Work?
Here are some important elements of forex trading to help you learn what is forex trading and how does it work.
There are many reputable forex broker companies which provide the opportunity to open forex accounts with them, and platforms to start out forex trading in global forex or FX markets. As an investor or trader you can choose a currency pair, such as EUR/USD and place a trade hoping that the pair would change in value at some point in future so that you can benefit from the change of price or value. The following
Forex trading is done typically by a broker or a market maker. The most obvious advantage of forex trading is the leveraged product, which is a pair of currency that you buy or sell by depositing only a small percentage of the full value of a position to place a forex trade. This leverage facility allows traders to place a forex trade without having to deposit the actual value of the product.
The pricing in forex trading is quoted in terms of one currency versus another. Each currency pair has a base currency and a counter currency. In EUR/USD, for example, EUR is the base currency and USD is the counter currency.
Pips and Spread
Another important thing to understand is Pips (Percentage in Points). Most currency pairs are quoted to 5 decimal places but the change is quoted from the 4th decimal place in price. For example, if EUR/USD price moved from 1.33500 to 1.33600, then the change in price is quoted 12 pips.
Spread is the difference between the BID/ASK of the currency pair you are trading in. For example, in USD/JPY currency pair if the price is quoted 95.40/95.43, then the spread is 3 pips.
If you trade according to the trends of the market, and analyzing fundamental and technical factors, you may benefit greatly from forex trading. It is very important to educate yourself when it comes to understanding what is forex trading. Learn about various factors such as economic data, international economic scenario, political situation in a given region or country and how that can have an impact on a particular currency or other global currencies. Finally, choose a reliable market maker or forex retail broker to open an account with and start forex trading.