What is Forex Trading?
Forex trading means where the currency pair is exchanged with one another.
In other words, forex trading is a term that we use to signify the trading of currency pairs. Overall, if we talk about this market this market is the most versatile market in the world. To understand what currency trading means let’s understand it through a basic example, suppose you are going on a tour from India to London, both the countries have different currencies so how are we going to survive in London? The answer to this question is that we will exchange Indian currency Rupees for London currency Pound. 1 pound = 100 rupees approx., meaning you have to pay 100 rupees in order to get 1 pound; we can exchange the currency for a pound at the airport or we can exchange the same at the bank before visiting that country. This procedure of exchanging currency is known as forex trading.
Well as per the example this is manual work to get the currency exchange from a bank or airport, but when this trading is done online with the help of any broker whichever is suitable to you, you can trade into any currency you want. The forex market is that much big that it is traded for over a trillion dollars exchange every day. By the amount of trade done every day you can imagine how much big the market is.
- Forex market is a currency exchange market where trillion of currency exchange is done in a day, it is the biggest market in the world.
- This market is traded in currency pairs, one currency is exchanged in another and this market can’t be manipulated as there are billions of people trading in this market.
- Forex trading can be done in two ways, either long (buy) or short (sell). Profit can be earned from either of the ways as per the trend going on.
- There are many major players who trade in forexes such as central banks, commercial and investment banks, investment managers and hedge funds, multinational corporations, and individual investors.
- Forex is traded 24*5, which means there is no time limit you can trade as per your availability but be sure to not trade at the opening and closing time of the market.
- Forex market is one of the most reliable markets because a lot of people and organization works in this market, which automatically makes the market reliable, but be sure to use certified brokers so you don’t face any fraud and loss of funds.
- There are several reasons for the market being attractive among people nowadays, such as extra money, Portability, Diversification, No Commission, Liquidity, Non-stop trading, No centralized exchange.
- Forex market has its advantages over the stock market, the forex market has no time limits, but the stock market has fixed timing, Stock market works one way whereas the forex market works both ways and many other advantages are there.
What is forex traded in?
The forex market is traded in different currency pairs, meaning one currency is exchanged for the other in the pattern of this marker. So, the currency pair has two parts 1. Base currency and 2. Quote currency.
Fig 1. Illustrates different currency pairs
In the above figure, the highlighted area in the box is the currency pairs, there are many currency pairs that exist, and these are just a few of them.
Base currency is the currency that is mentioned first in the currency pair. For example, GBPUSD is a currency pair in this pair the base currency is GBP
Fig 2. Illustrate the base currency
In the above figure 2. The highlighted area in the box means GBP, which will be known as the base currency here.
The quote currency is the currency in which the currency is exchanged to means the second currency in the currency pair. For example, in the EURUSD quote currency is USD
Fig 3. Illustrate the quote currency
In the above figure 3. The highlighted currency in the box which is USD is the quote currency.
From the above discussion, it can be said that the currency pair exists if and only if there are 2 currencies in it.
Apart from these three terms, one more important term is there, which you have to understand if you want to trade in forex the term is Exchange rate.
The exchange rate is basically the price for which another currency can be purchased in. For example, if you must buy a USD then you have to pay INR 75 approx. to get 1 USD so the price meaning 75 rupees is the exchange rate for getting another currency.
This term itself has importance in this market because the total work of the forex market is on currency pairs meaning we have to make the exchange of some amount to get that currency.
Fig 4. Illustrates exchange rate of dollar
The above figure 4., talks about how much the value of a dollar is on that particular date and time, it changes every day, and it depends on how much strong the USD is in comparison to INR.
Who trades in forex?
Well, there are many participants who are major parts of the forex market, we all know that without investors the market is nothing so there must be the major parties who are investing a lot of money in this market. So here are the major players in the forex market.
Fig 5. Illustrates the major players of forex market.
As per the above picture, there are total 5 major players, let’s see how they contribute:
- Commercial and Investment Banks: Banks play an important role in forex trading, as it is all about money and banks are the place where we keep our money. Interbank transactions are the most common way of transferring funds. These banks make payments to their clients in this way they contribute the most to the market. Banks facilitate forex transactions of their clients and they also conduct their speculative trades from their own trading desk. So, if the bank is facilitating the transaction of forex then the difference between the bid and ask price (Spread) is the bank’s profit.
- Central Banks: Central banks are the one that depicts nation government. So, whichever policies and market operations are changed as per government rules and regulations make a huge impact on the value of their national currency which directly makes an impact on the forex market.
- Investment Managers & Hedge Funds: These are the funds that are also making a huge impact on the forex market. Investment managers trade in various currencies with large amounts to get huge profits.
- Multinational Corporations: The firms which are included in the import and exchange of goods also plays important role in the forex market as the payment done or payment received are done in different currencies which means that the currency exchange is done to make that payment.
- Individual Investor: Now the small investment which is done by individual traders does play their part. Yes, the amount which is invested by individual investors is not as much as compared to other parties, but the attractiveness of this market is increasing among the youth and more investors are getting into this market, so the percentage is increasing day by day.
Trading hours of Forex
The market is open 24*5 days which means there is no time restriction, you can trade any time you want. And it is on you as per your availability whenever you are free you can trade.
Opening and closing hours for some countries are as follows:
Fig 6. Illustrates the time zone of major forex regions
Along with that one thing to note is that never trade during opening and closing hours of the market because the market is very volatile, and you might suffer a huge loss if you trade at that time. Otherwise in between trade anytime you want.
Is Forex Market Reliable
Yes, the market is reliable because it is traded all over the world, and trade is done over a trillion of dollars a day. If this much amount of money is exchanged regularly then there is no way that the market is not reliable. One thing to note is that the market is tricky so if you are trading then trade with care. Do not invest real funds unless you are clear about the basics of this market.to learn about the strategies use a Demo account.
How Forex market works?
The major fact of the forex market is that you can earn both ways meaning you can earn profit either by buying or by selling the currency depending on the trend and predictions. Some of the currency pairs will give you profit on the buy position whereas some of them will give you profit on the sell position simultaneously. That’s where this market is different from the stock market. The stock market is one-way trade, and the timing is fixed for that market whereas the forex market has the advantage of being able to trade on both sides along with that no time limit as the market works both ways.
How can you trade in forex?
To trade in forex, you are needed to follow a few steps:
- Find a broker, which has the lowest cost and best services, for example, there are brokers such as Exness Broker, OctaFX Broker, XM Broker, etc.
- Open the account after checking the description of account types, my recommendation is to use a cent account if you are a newbie.
- Make sure to open an account for the MT4 platform instead of any other platform
- Download MT4 software from the broker site with which you are opening your account.
- Login with the credential provided to you after your account is opened.
- Deposit money and start trading.
Though these are the point to keep in mind if you want to trade in forex, the best suggestion is to go with a demo account in order to know all the basics of the market and that can make you better while learning once you are confident enough then open a real money account and start trading.
Reasons why Forex trading is attractive
Fig 7. Illustrates the reasons why forex trading is attractive
There are several reasons why people are moving towards forex trading nowadays:
1. Extra Income: Well, this is like everybody’s dream, who doesn’t want to earn extra? If you have to fulfill your dream, then it is true you can’t depend on only one source of income. In such a way even if I think I would like to earn more money and forex seems to be the best fit.
- Portability: By the time this market has become more portable, you are not needed to sit at the desk and look at the movement in charts all day long as there any many changes were done to the platform on which trading is done, you just have to analyze using indicator place you bid and even you can set the take profit amount and leave your desk the rest is up to the platform to do.
- Diversification: Forex market is the most diversified market because there is no actual ownership of the asset as it is in the share market. You can trade using small investment funds as well, using a hedging strategy one can earn more.
- No Commissions: There are many brokers who don’t charge a single penny on the services they are providing to trade means no commission is deducted at all due to which the overall cost of trading become really less as compared to the earning you will do If you do it correctly.
- Liquidity: It signifies that an asset can be bought in the market without affecting its overall price of it. Because the number of people investing in this market is huge the manipulation can’t be done in this market.
- Non-Stop trading: As the market is open 24 hours 5 days that means there is no stopping you can trade nonstop unless you feel tired.
- No Centralized Exchanges: The forex market is global which means it is not operated by any centralized exchange instead it operates constantly, it is split into 3 main forex regions which are Australia, Europe, and North America.
What is difference between forex and stock market
There are two major difference in these two markets.
- Stock market is open for a limited time period 5 days a week, whereas the forex market is open 24 hours 5 days.
- Stock market is known to trade only in one way whereas, the forex market can be traded in 2 ways that are bought (long) and sold (short)
- In the Stock market is only for trading stock whereas, the forex market is a currency exchange
- Stock market has low leverage whereas, the forex market has high leverage.
- In the stock market liquidity depends on the company and market whereas, in the forex market liquidity is high and always present.
That’s why this is more attractive among youngsters as you can trade whichever time is convenient to you and you can earn both ways.
Fig 8. Illustrates the major difference between stock market and forex market.
The foreign exchange market also known as the FX market is a global marketplace where currency exchanges are done. Because the market is reachable all over the world that’s why it is the biggest financial market in the world with no time limit as the market is open 24*5 days which means you can trade at your convenience. Currencies that are traded in this market are exchanged on the exchange rate of that currency. Many major banks and MNCs plays the biggest role and are known to be major players in this market. Market manipulation is next to impossible because a lot of people are investing in it and doing trading. The Platform is overall good to make some extra income, but it is tricky as well, so it is suggested to first understand this market and then only invest with real funds. To learn about this market there is a lot of educational material provided by the brokers along with that for better understanding brokers offer demo accounts with virtual currency added to It the help of which you can start trading and learn about it.