What is forex trading and how to trade forex?
Forex (FX) is known as Foreign Exchange or Currency Trading.
Foreign exchange is the process of changing one currency into another for various purpose, usually for business, trading, or tourism. For example, if you live in the USA and you are travelling to Europe, you will use your US dollars (USD) to buy euros (EUR). In the forex trading, that transaction is represented by the symbols EUR/USD.
Forex is one of the most actively traded markets in the world, with individuals, companies and banks carrying out average daily turnover of $7.6 trillion according to a 2022 report from the Bank for International Settlements.
The FX market is open 24hrs 5days a week with most important world trading center being located in London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Paris and Sydney. The global nature of the forex market it operates 24 hours a day, with the busiest times for transaction volume shifting between major financial centers across different time zones.
What is Forex Trading?
Is similar to the currency exchange you may do while traveling overseas but the only difference is that Forex Trading require trading of currencies from different countries into pairs (sell or buy a currency pair) and the exchange rate constantly fluctuates based on supply and demand.
For example, if you think the euro is going to rise against the U.S. dollar, you can buy the EURUSD currency pair. But if you buy the euro against the dollar (EURUSD), and the U.S. dollar strengthens, you will then be in a losing position. So, it’s important to be aware of the risk involved in trading Forex, and not only the reward.
Forex trading is conducted over the counter (OTC), meaning there’s no physical exchange address, this means that all trading occurs via computer networks among traders worldwide rather than on one centralized exchange.
What moves currency prices in forex markets?
Exchange rates are constantly moving, based on supply and demand. Whether one currency is in higher demand than another, depends on the perceived value of owning it, either to pay for goods and services, or as an investment.
There key factors that can affect the prices of currency as follows; -
Central bank decisions: Central banks across the globe are responsible for setting interest rate levels for each country. This rate dictates the interest for lending the money between the institutions, consequently controlling the economy’s money flow.
To strengthen the exchange rate, the central bank simply raises its policy interest rate. As investors in search of higher returns increase their demand for the currency, the exchange rate appreciates. By lowering interest rates, the central bank can weaken the exchange rate.
Central bank board’s usually meet several times per year to vote on the rate policy. The options are to raise, lower or keep the rates put. Recent trends brought the rate to the lowest point in the U.S. after the Federal Reserve Bank cut the rate to 0 while stimulating the economy by making the financing cheaper. it’s a good idea to monitor the central banks related to the ‘major’ currency pairs: the US Federal Reserve, Bank of England (BoE), Bank of Canada (BoC), European Central Bank (ECB), Reserve Bank of Australia (RBA), Bank of Japan (BoJ), Swiss National Bank (SNB), and Reserve Bank of New Zealand (RBNZ)
Geopolitical factors: Wars, political crises, global unrest, and other related events can also impact the foreign exchange markets. Some currencies tend to do well when there is an elevated level of uncertainty in the markets, while others go in the opposite direction.
Economic Statistics: Employment numbers, gross domestic product (GDP) levels, inflation, business sentiment, and consumer sentiment, all tend to affect the movement in currency price.
Supply and demand: Supply and demand is one of the fundamental principles of economics. If demand is rising for an asset, particularly one that has exceeded its supply, it is likely that the price will rise, and vice versa. This will also mostly control currency market prices, which fluctuate every second when the market is open due to the millions of trades being made throughout the day.
“Reaching any goal in trading requires specific domain knowledge and technical skills. But then, after that, it's all mindset management. Yet most people ignore that —they automatically think they have that last part all figured out, and it's a mistake.”
― Yvan Byeajee,
To continue learning click the link below
