How To Do Forex Trade – Learn more about forex trading, how the FX market works and what determines the prices of currencies, different trading methods and tools. Read on to find out how to trade forex with CFDs on.
Forex trading is the process of buying and selling international currencies with the aim of profiting from fluctuations in exchange rates between different currencies.
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The word ‘forex’ stands for foreign currency. The Forex market allows the trading of fiat currencies of different countries against each other. For example, exchange the British pound against the US dollar (GBP / USD).
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What is forex trading and how does it work? Currency or foreign exchange trading – often called FX – trades currency pairs to try to profit from fluctuations in exchange rates.
While assets such as stocks and commodities are traded on regulated central exchanges, currencies are bought and sold over the counter (OTC), which means that trading is mainly done between groups of institutions in major forex trading centers around the world. This is called the interbank market.
The largest and most liquid of these FX trading centers are London and New York. Tokyo, Hong Kong, Frankfurt and Singapore are also important centers of financial exchange.
Forex is the most active market in the world by trading volume and, with nearly 7 trillion trades per day, the largest market by value.
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As the market is international, forex trading is conducted 24 hours a day, excluding weekends, and determines the exchange rates for all currencies in the world.
How does forex trading work? Forex investors trade currency pairs – sometimes called crosses of pairs that do not include the US dollar – to see when one currency is likely to outperform another.
Forex trading involves buying one currency while selling another. Traders try to make a profit by selling the currency at a higher price than when they bought it. A currency pair has a base currency and a quote currency. The exchange rate shows how much money is needed to buy one unit of the underlying currency.
Each currency is represented by a three letter code, the first two usually refer to the country and the third refer to the currency, for example USD for the US dollar, CAD for the Canadian dollar and NOK for the Norwegian krone. There are exceptions, such as the EUR for the euro and the MXN for the Mexican peso.
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The most traded forex pairs include the euro against the US dollar (EUR / USD), the US dollar against the Japanese yen (USD / JPY) and the British pound against the US dollar (GBP / USD).
A forex trader buys and sells pairs when he expects the price to fluctuate. For example, if a trader believes that the euro will rise against the dollar, possibly due to strong economic data in the euro zone, he can take a long position on the EUR / USD currency pair. If they expect the euro to fall, they can short the pair.
Before learning how to start trading forex, it is helpful to know a little of the common language used by traders. Here is a simple glossary of the words you will encounter:
Low point – equals 1/100 of 1%, or 0.01% – or 0.0001 of the second value of the currency. It is usually called “pip”
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Day trading: Entry and exit of forex trading on the same day. This is a common strategy used in CFD trading platforms
Dollar Index: A measure of the strength of the US currency against a basket of other currencies including the euro, pound and yen. Its symbol is DXY
Leverage: This allows the trader to open much larger positions than he could previously cover. It means that you can significantly increase your profit on winning trades, but the risk of losing more than your initial deposit. Beware of risk warnings on trading platforms and trading apps that offer dynamic trading
Liquidity: A highly liquid market has sufficient trading volume to ensure smooth price movement. Illiquid markets have a low level of trading activity and can cause price volatility
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Lot – Forex is traded in monetary units known as lots. The standard lot size is 100,000 units, although smaller lots of 10,000 and 1,000 units can be handled.
Margin is relative to the average and represents the minimum amount you need to deposit to trade at the specified price.
Limit call – when your open position moves against you, your trader will call the limit to offer you more money to cover your limit.
Pip – stands for “Spot Interest Price” and is the smallest amount that can change the price by one second. For two quoted currencies, one pip will be 0.0001.
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Spread – this is the difference between the bid – or sell – price and the ask – or buy – price of the currency.
Exchange rates fluctuate frequently throughout the day, depending on whether one currency is more in demand than another. As the forex market covers currencies from around the world, there are many factors that can guide the direction of different pairs, based on the estimated price of paying for goods and services or the investment.
If you want to learn about forex trading, here are some factors that can affect currency prices that you should be aware of.
The value of a nation’s currency is largely determined by the health of its economy. Forex markets react to the release of key economic data, as it provides a picture of how a country’s economy is doing and how it compares to other countries.
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Gross Domestic Product (GDP), which measures the value of all finished goods and services produced by a country over a period of time, is one of the most important metrics for measuring a country’s economic performance.
Currency prices also react to political news and national and international events. As a world reserve currency, the US dollar is considered a safe haven, increasing its value in times of macroeconomic uncertainty and political instability.
An example of the impact a political event can have on a currency would be the Russian ruble, which lost a third of its value in the two weeks following the Russian invasion of Ukraine and the imposition of sanctions by Western countries. The ruble reversed its price action afterwards, quickly returning to pre-attack and higher levels due to rising oil and gas prices.
The stance of a country’s monetary policy in response to inflation is an important factor as high interest rates attract investors to get higher returns on their money. For this reason, exchange rates tend to move in favor of currencies with high interest rates.
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The cost of the products can bring money in different directions depending on whether the countries are importers or exporters. The currencies of countries that export large volumes of goods, such as the Australian dollar, the New Zealand dollar, and the Canadian dollar, are called trade currencies.
If you are interested in how to trade forex, there are many tools you can use depending on your trading strategy and market forecast.
Most FX transactions are conducted by large institutions across the interbank market, often up to hundreds of millions of dollars at a time. But with the advent of online trading platforms, as opposed to physical exchanges, retail traders can now engage in the financial markets.
Counting 2 trillion of the total FX market, a spot transaction is a direct agreement between two counterparties to buy one currency against the other and receive delivery at an agreed price on the settlement date.
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Each investor is not involved in the local market. Unlike other instruments such as futures, options and exchange traded funds (ETFs), which are traded on a centralized exchange, hidden forex contracts are traded via over-the-counter (OTC) contracts between the parties.
The main area of the forex market is the “transaction” market, where traders trade with each other. It is also called the “interbank” market, as banks are the main sellers. Intermediate trading is only accessible to institutions such as banks, insurance companies, pension funds and large corporations that operate in large volumes.
Options are financial instruments that give the buyer the ability to buy / sell an asset at a fixed price on a specified maturity date. If a forex trader buys an option, he can buy the currency at the specified exchange rate on the expiration date.
Unlike forex contracts, options and futures are traded on an exchange. However, while the forex markets are traded around the clock, trading options are limited to the trading hours and liquidity is lower than in the spot and futures markets.
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Futures are contracts that bind a trader to buy or sell an asset at a specified price on a specified future date. This is the main difference between an option and a futures contract: an option offers traders the ability to buy or sell, while a future forces them to execute the trade. Forex traders use futures to predict the value of a currency
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