The Fundamentals of Forex Currency Exchange Trading
Published August 5, 2021.
What is Forex Trading?
Becoming a widespread practice in recent years, the term forex is a combination of the words foreign currency and exchange. In simpler terms, foreign exchange is the process of converting one currency into another for any purpose, most commonly for trade, tourism, or business. Nowadays, the term forex gets thrown around vaguely, so it's normal that many people ask themselves, "what is forex trading?"
How The Forex Market Works
Currency trading takes place in the foreign exchange market. Since the dawn of business, currencies have been essential, allowing people to buy goods and services both locally and globally. To undertake worldwide commerce and trade, international currencies must be exchanged.
If you live in the United States and wish to buy a product from France, you or the business must convert the currency. This is the entire premise on how the forex market was built, although foreign currency trading is primarily online now.
2 Main Types of Forex Markets
As we've mentioned before, the forex market is the place where currencies are exchanged. It is the world's first entirely uninterrupted and continuous trading market, being predominantly online forex trading. Before the days of the internet, institutional businesses and major banks dominated the forex market acting on behalf of their clients. As a result, there are multiple types of trading forex. These include, but are not limited to:
1. Spot Market
Since trades are primarily made in real-time, forex trading in the spot market has traditionally been the most popular. The forex spot market is a way of exchanging currencies at an immediate rate, also known as the spot rate. With the introduction of computerized trading and the rapid increase in brokerages, trading volumes for forex spot markets have massively increased. When beginners talk about the forex market, they almost always mean the spot market.
2. Forwards and Futures Markets
In the over-the-counter/electronic (OTC) markets, a forward contract is a private agreement between two parties to buy a currency at a specific price at a future date. A futures contract is a standardized agreement between two parties, namely the client and the brokerage, to provide a currency at a set price and a future date.
The forwards and futures markets, unlike the spot markets, do not deal with real money in real-time. Instead, they work using contracts that reflect claims to a particular currency type, a specified unit price, and a future settlement date.
These contracts are purchased and sold OTC on the forwards market between two parties who define the agreement's terms. Futures contracts are bought and sold on public commodities markets, like the Chicago Mercantile Exchange, based on a predefined size and settlement date.
How Forex Traders Make Money
Traders and speculators can buy and sell currencies on the foreign exchange market based on whether they believe the currency will rise or lose in value. Although being massive and potentially profitable, the foreign currency market is relatively risky for beginners, with more than $5 trillion exchanged every day.
To execute transactions, traders must use an intermediary like a forex broker, although many start purchasing assets even before they learn forex trading. Unlike traders, forex brokers profit through commissions and fees often regardless of whether the trader earns profits or losses.
Terminologies in Forex Trading You Need to Know
The bid and ask prices are included in all currency quotations, so most beginners wonder what they mean. However, attentive forex readers have noticed that the bid price is almost always less than the ask price. So, what is a bid, ask and spread?
Bid: The price at which your broker will purchase the base currency in return for the quotation currency. If you want to sell something, the broker will buy it from you at the bid price.
Ask: Your broker's ask price is the price at which the base currency will be sold in exchange for the quotation currency.
Spread: The spread is the difference between the bid and the ask price. Usually, a lower spread indicates low market volatility and relatively high liquidity.
How To Start Forex Trading
Forex trading is comparable to stock trading. Here are some guidelines to help you get started with FX trading:
Study the basics and learn forex trading
For beginners, there are thousands of courses on the internet that teach the fundamentals of online forex trading. Starting to learn at a reliable website like Fortrade is a step in the right direction.
Set up a brokerage account
Setting up a brokerage account with the best fx rates is crucial for becoming a successful forex trader. When you open a forex trading account at a reliable brokerage, the vast world of foreign currency trading is available at your hand's reach.
Develop a trading strategy
A solid trading strategy when doing online currency trading is a necessary step. Unfortunately, many beginners start spending money before they learn forex trading, leading them down a path of losses.
Stay up-to-date with your numbers
Before purchasing more assets, ensure that you don't have any open positions that need to be filled out. Moreover, research the market and be confident that you have enough money in your account to trade in the future.
Using Leverage For Trading Forex
Using borrowed capital to multiply returns is known as leverage and is a common practice in online forex trading. The forex market offers customers enormous leverage, allowing traders to effectively utilize it to enhance their positions.
After learning all the basics about the forex market, you can rest assured that foreign currency exchanges are within your hand's reach. While many question themselves on how to trade forex for beginners, the truth is that you don't have to be an expert to get started. After finding an excellent online broker with the best fx rates, you can join the world of online forex trading and have a profitable journey along the way.
One of the best brokerages you can consider opening a forex trading account at is Fortrade. Putting it simply, this broker offers more than enough, providing you with the best fx rates for beginners and experts alike. So, consider opening a forex currency trading account at Fortrade and give the market a chance.