what is forex trading
forex trading

Forex is the market for different currencies used worldwide. For instance, Euro is the currency in circulation all over the European countries. Similarly, US dollar or USD is the currency in circulation in the United States. Forex trading involves concurrent purchasing and selling of currencies. Basically, it is trading currencies from diverse countries against one another. An instance of forex trade is to purchase the Euro while selling the US dollar simultaneously. This is what is well known as “going long” on the USD/EUR or vice versa.

What is traded ?

Currencies in the foreign exchange market are traded in pair. In this regard, a dealer or a broker plays a major role. In fact, forex trading is done through the market maker who is also called the broker. If you practice forex trading, then as a forex trader you may select a currency pair, which you can expect to change in value and to place the trade consequently.

For example, if you had bought 1000 Euros in February 2006, which would have cost you around $1,200 USD. Now all throughout the year, the value of the US dollar VS the value of the Euro has increased. As the year ends, 1,000 Euros was worth $1,300 USD. At this point, if you choose to end the trade, then you would have $100 gain.

Major, Minor, Cross Currency and Exotic pair

You can image all currencies in pair at war against one another. The exchange rates tend to change based on the stronger currencies at the very moment. Some of the currency pairs are referred to as majors. All of these pairs contain the USD or US dollar on one side and are often the most traded. Moreover, the majors are also “most liquid” and “most traded” currency pairs: USD/CHF, GBP/USD, USD/JPY, EUR/USD, NZD/USD, USD/CAD.

The currency pairs that don’t include the USD or US dollar are referred to as cross currency pairs or just crosses. The major crosses are also referred as minors and some of the most actively traded crosses contain 3 primary non USD currencies like GBP, JPY and EUR. The currency pairs that are known as minor include AUD/CAD, NZD/CHF, AUD/CHF, NZD/CAD.

The exotic pairs usually made up of currency of a major currency connected with the currency of any emerging economy like Hungary, Mexico or Brazil. A few examples of exotic currency pairs are as follows: USD/NOK, USD/SEK, USD/THB, USD/HKD, USD/SEK, USD/DKK, USD/ZAR etc.

As said earlier, the forex trades are placed through the market maker or broker. In online trading forex, the orders can be placed with a few clicks and the market maker or broker can then pass on the order along to the partner in Interbank Market in order to fill out your position. When the trade is closed, the broker closes the position on Interbank Market and credits your own account with gain or loss. This process takes place within a few seconds.

A trader in the foreign exchange market usually comes up with few diverse methods to invest in currencies. Some of the most common ones include futures, forex spot, exchange traded funds or ETS and options.

Spot market.
With the use of current market price, currencies are usually traded immediately or right on the spot in the spot market. This market includes small spreads and usually maintains 24 hour operations. It is very easy to chip in. The best thing is that accounts can also be opened with as little as $25 investment. Usually brokers offer forex news, charts and more information absolutely free.

Exchange traded funds.
One of the newest entrants in forex trading or foreign exchange market is the ETF or Exchange traded funds. It contains a combination of some currencies and a set of stocks, which allows the trader to branch out with the other assets. All of which, are produced by financial institutions, and can well be traded like stocks through exchange.

Options.
It’s a financial instrument giving buyer the opportunity or the ability to sell or purchase an investment at any specified price on the completion date on the option.

Futures.
It refers to contracts to sell or purchase any particular asset at any particular fee on a particular date or in the future. This is the reason why they are called futures. The Forex futures are designed by CME or Chicago Mercantile Exchange way back in the year 1972. This is a well regulated and transparent market where transaction and price details can be easily obtained

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