Forex trading, also known as currency trading, involves trading currencies and speculating on fluctuations in the price of a currency over a period of time. Traders buy or sell one currency against another. As a trader, you will benefit from changes in exchange rates between a currency pair. You are contemplating whether the value of a currency such as the euro will rise or fall against another currency such as the US dollar.
The Forex market has the largest trading volume in the world, with over $ 5 trillion of currencies traded daily. For this reason, the market is very dynamic and highly liquid. With this liquidity, exchange rates can move quickly in response to market news, political situations and key economic events. Since the foreign exchange markets largely reflect the political and economic events associated with different regions, traders can take advantage of this market influence by trading.
A forex position is always quoted in currency pairs such as GBP / USD (also known as cable). To make a profit, you need to look at the fluctuations in the exchange rates of the two currencies. The first currency is called the base currency. Forex trading assumes whether it will improve or decrease in relation to the quote currency.
When you open a trading position, you are speculating in the direction the market will move. You enter either a buy (long) or a sell (short) position, depending on which direction you think the value of the currency will go. The movement of prices in the foreign exchange market is affected by the strengthening and weakening of the value of currencies.
There are hundreds of currencies in the world, which are often divided into three main groups based on liquidity and popularity. These are majors, minors and exotic.
Most Popular - the most liquid or most actively traded currencies.
Large companies account for 85% of the total trading volume in the forex markets. Our spreads for major currencies are smaller than for minor or less traded currency pairs.
Less popular - not as actively traded as large ones, and often more volatile. Spreads for minor pairs are also generally wider due to the average market liquidity compared to major pairs.
Exotic - Exotic currency pairs are traded less frequently.
Due to the small volume of trading, currencies are not considered liquid. They tend to be more expensive to trade due to wider spreads and traders add them to their trade due to their higher risk / reward profile.
As in most other financial markets, supply and demand primarily control the movement of prices in the foreign exchange markets. Banks and other large investors want to invest in an economy with strong potential.
If good news about a particular country reaches the markets, investors are encouraged to invest more money, which increases the demand for the country's currency.
If there is no corresponding increase in the supply of the currency, higher demand will trigger a price increase. Likewise, bad news can discourage investors from investing. This, in turn, will lead to a fall in the price of the currency. It can be said that a country's currency reflects the economic condition of the country it represents.