Beginner’s Guide to Forex Trading: How Does It Work?
Foreign exchange or forex trading is something people do when they need foreign currency while traveling to other countries. It means exchanging your home country’s currency for another through a bank or a forex broker. You’ll receive the foreign currency based on the current exchange rate of the broker or bank.
Although forex trading is usually done for practical purposes, some do it to make a profit. The amount of currency converted each day on a global basis makes the value or exchange rate of certain currencies extremely volatile. Just like with trading stocks, forex traders try to anticipate the changing values of currencies between two countries.
The coronavirus pandemic has caused high market volatility in foreign exchange. Some traders see this as a chance to magnify their profits by manipulating the highs and lows of the market.
If you’re interested in trying your hand at forex trading, now may be a good time to enter the market. Fair Forex explains the basics of how currency markets and forex trading work to help beginner traders avoid walking away empty-handed.
How Do Currency Markets Work?
Forex trading occurs directly between two parties through an over-the-counter market, unlike shares or commodities that are traded through a bourse or any centralized location. A global network of banks runs the forex market in different time zones: London, Tokyo, New York, and Sydney.
Forex trading occurs 24 hours a day because there’s no central location, unlike stock exchanges that have trading hours.
There are three types of forex markets:
- Spot market: A spot trade is a binding agreement to sell or buy a currency at the current price on the spot. The trade takes place at the exact point that two parties agree to it.
- Forward market: A forwards contract obliges a buyer and seller to trade at a set price and date in the future. It is a private and customizable agreement that is settled at the end of the contract. The trade occurs in an OTC market.
- Future market: A futures trade has the same mechanics as a forwards trade. The difference is that a futures trade has a standardized contract and occurs in an exchange. The prices are settled each day until the end of the contract.
Traders try to predict exchange rates to take advantage of price movements in the market. Many factors drive price fluctuations, including central banks, the country’s credit ratings, economic data, and market sentiment, among others.
How Does Forex Trading Work?
There are various ways to trade forex, but generally, they all happen in the same way: you buy one currency and sell another. Forex brokers traditionally facilitate the trade between the two parties. But with the rise of digitization and the emergence of the coronavirus pandemic, online trading has become more and more popular. Brokers are starting to go online, as well.
A lot of forex trading occurs between major financial institutions and banks. These institutions are also market movers since they buy and sell massive amounts of currency every day. But for individual traders who won’t be making million-dollar trades, you have two options: trading via a broker and forex CFDs.
CFD means “contract for difference,” which is a trading instrument popular among investors who want to enter financial markets. A forex CFD allows you to predict whether a currency’s price will move up or down without having to buy it.
You can open a long or short position, depending on which direction you think the price will go. Open a long position if you think the forex will increase in price. Otherwise, open a short position.
Forex Trading Via a Broker
You can trade either through a broker or a bank. This works similarly to CFD trading. You speculate on the price fluctuations of pairs of currencies without having to buy any of the currencies themselves. You open a short position if you think the price will go down, and a long position if you believe it will go up.
The broker will hold your money in an account that changes in value each night, depending on daily losses and profits. Brokers use different trading platforms and have varying requirements for account minimums and transaction fees.
There’s a lot more to learn about how forex trading works before you can enter the market. You have to understand the jargon, choose your trading platform, and create a trading plan. Beginners would benefit significantly from expert support and advice to avoid disastrous losses.
Fair, Low-Spread Forex Brokers
Helping traders succeed in the currency market, Fair Forex has built a reputation for being a dependable low-spread forex broker. We share valuable trading skills and techniques, and financial success indicators to help you make strategic decisions, increasing your profitability.
Contact us for enquiries about our services or to learn more about the foreign exchange market.