Forex trading is the process of trading foreign currencies, and this is done for various reasons, including commercial, tourism, and enabling international trade. The foreign exchange market is usually open to buy and sell currencies 24 hours a day, five days a week, and is used by banks, businesses, investment firms, hedge funds, and retail traders.
All you need to know about forex trading is:
1. Trading currencies: All currencies are assigned a three-letter code, of which it is important to know that the USD is involved in a vast majority of forex trading while the second most popular currency is the EUR. Other major currencies are: the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD), the Swiss franc (CHF) and the New Zealand dollar (NZD).
2. Quoting a forex trade: A currency pair represents the two currencies’ current exchange rate. For example, in the case of EUR/USD, the currency on the left (the EUR) is the base currency, while the currency on the right (the USD) is the quote currency. The exchange rate represents how much of the quote currency is needed to buy 1 unit of the base currency. As a result, the base currency is always expressed as 1 unit, while the quote currency varies based on the current market and how much is needed to buy 1 unit of the base currency.
3. Ways to trade forex: Most forex trading is quite similar to stock trading, whereby traders buy currencies whose values they think will increase relative to other currencies. The different ways to trade forex include the spot market, the forward market, and the future market. The spot market is where currency pairs are swapped and exchange rates are determined in real time based on supply and demand; the forward market is where forex traders can enter into a private binding contract with another trader and lock in an exchange rate for an agreed upon amount of currency on a future date; and the futures market is where traders opt for a standardized contract to buy or sell a predetermined amount of currency at a specific elapsed time.
4. Forex terminologies: The forex market, like all other industries, has its own set of terms, which are as follows: a currency pair; a pip, which is the smallest possible price change within a currency pair; a lot, which is a standardized unit of currency; leverage, which simply means borrowing money; and margin, which is the money traders put down upfront as a deposit.
5. Finding a forex trader: Finding a trustworthy forex trader can be a difficult task, but it is worth the effort. However, you can measure a good forex trader by these two major qualities, which include: someone who knows what they are doing and has been around long enough also ensuring they have accurate and expert knowledge.
6. Limits: Knowing your limit as a trader is an important factor. This includes knowing how much you are willing to risk on each trade; setting your leverage ratio in accordance with your needs; and never risking more than you can afford to lose.
The forex market is by far the largest and most liquid financial market in the world and has no central marketplace or exchange in a central location, as all trading is done electronically via computer networks.