The forex market offers traders from around the world the ability to buy and sell different currencies (or currency pairings) as assets. It is possible to make a profit from speculating on currencies by taking advantage of constantly changing exchange rates, which will increase or decrease one currency’s value against another.
The size and liquidity of the forex market make it one of the most popular in the world, and it is well renowned for its fast paced nature. Trading forex is done electronically, by placing buy/sell orders (depending on whether you think a currency will rise in value or fall in value).
From a forex perspective, a currency derives its value by being measured against another currency. As such, currencies in forex are always traded in pairs, such as EUR/GBP (euros measured against pound sterling) or USD/JPY (dollars measured against yen).
There are many different currency pairs to choose from, but all of them are separated into three different categories: major, minor and exotic. Major pairings always contain the dollar as the base or the quote currency, whereas minor pairings do not include the dollar, but do include currencies from other major economies around the world. Exotic pairings contain a currency from a major global economy paired with a currency from an emerging or smaller economy and tend to be more volatile.
How the Market Works
There are a number of different ways to trade forex, which include:
* Directly buying units of currency (spot FX)
* CFDs (contracts for difference)
Each of these forex trading methods involves speculating on the future value of a currency, but they have some key differences (with CFDs, for instance, you never own the units of currency you are investing in).
As a forex trader, you can either go long (‘buy’) or go short (‘sell’) to open a trade, depending on whether you believe a base currency will rise or fall in value against the quote currency.
A currency’s value is always driven by supply and demand, so to be a successful forex trader you must look into what drives the demand of a currency. Some of the main factors include:
* Economic events (e.g. the decisions of central banks)
* Political events (e.g. new legislation, elections)
* Catastrophes (e.g. war, natural disasters)
By monitoring each of these relative to the countries which the currencies come from, you can make informed predictions about how the currency may rise or fall in value in the future.