Forex trading, or currency trading, or FX trading, as it can be also abbreviated, are all terms that describe the currency exchange market as we know it today, which in simple language refers to the global, decentralized marketplace where individuals, companies and financial institutions exchange currencies for one another at floating rates.
The current floating rates system, which we know today, was adopted after World War II and has been in effect ever since. Prior to the current forex trading rates system, a monetary management system called the Bretton Woods Agreement was in existence, in which the exchange prices of currencies against each other were tied and correlated to the reserves of gold in possession of the two countries that were the originators of the actual currencies related to a transaction.
Forex Trading Marketplace
The forex trading marketplace, as it stands today, is the world’s largest and most liquid market due to a number of factors which include, but are not limited to, ease of performing transactions over the internet, the modern development of travelling, ease of international communication and modern transportation, which have made our world a smaller place.
By making our world a smaller and more global place, this automatically means that people, goods and services can travel faster and more easily. This also means that a necessity of currencies to be traded against each other is needed in order for this to happen. All these factors have determined a growing forex trading marketplace, which will only continue to grow and become more dynamic, liquid and responsive.
Online Forex Trading
Among the main participants of the forex trading market, one of the most growing segments of the total pool of participants of the marketplace, are retail foreign exchange traders (individuals) who participate in online forex trading for mainly speculative reasons with the ultimate goal of generating a profit from currency fluctuations (market changes), or hedging unwanted currency risk.
This segment participates in the forex trading marketplace via a broker (like XM), or via a bank. In this case, the bank or the broker will issue the retail client a trading account that will be funded in a base currency (usually the local currency of the region where the client is domiciled), and the client will have the opportunity to buy and sell currencies both online and over the phone with the goal of deriving profit.
Forex Trading via a Broker
Participating in the forex trading market via a broker like XM means that the client receives access to real-time pricing of the forex market and is quoted buy and sell prices for a number of instruments via an online trading platform. The client has the freedom to decide at which price they decide to buy or sell, and vice versa, and can execute a transaction at any time they wish.
What is Forex Trading?
Forex trading, also known by the name of currency trading or FX trading, refers to buying a particular currency while selling another in exchange. Trading currencies always involves exchanging one currency for another.
The ultimate aim can vary and can be any of the below but not limited to the below:
- 1. Exchanging currency A (e.g. USD) to currency B (e.g. EUR) for travelling purposes;
- 2. Exchanging currency A (e.g. USD) to currency B (e.g. EUR) for trading purposes;
- 3. Exchanging currency A (e.g. USD) to currency B (e.g. EUR) for speculative purposes, with the goal to make a profit.
Due to all the above, and not limited to the above, the forex trading market is today the world’s most liquid and most volatile market, with over $5 trillion traded daily.
How Does Forex Trading Work?
Forex trading is in essence trading currencies for one another. As such, an XM client sells one currency against another at a current market rate.
In order to be able to trade, it is required to open an account and hold currency A and then exchange currency A for currency B either for a long term or a short-term trade, with the ultimate goal varying accordingly.
Since FX trading is performed on currency pairs (i.e. the quotation of the relative value of one currency unit against another currency unit), in which the first currency is the so-called base currency, while the second currency is called the quote currency.
For example, the quotation EUR/USD 1.2345 is the price of the euro expressed in US dollars, which means that 1 euro equals 1.2345 US dollars.
Currency trading can be carried out 24 hours a day, from 22.00 GMT on Sunday until 22.00 GMT on Friday, with currencies traded among the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Paris, Sydney, Singapore and Hong Kong.
Who are Forex Trading Market Participants?
Forex trading market participants can fall in any of the following categories:
- 1. Travellers or overseas consumers who exchange money to travel overseas or purchase goods from overseas.
- 2. Businesses that purchase raw materials or goods from overseas and need to exchange their local currency to the currency of the country of the seller.
- 3. Investors or speculators who exchange currencies, which either require a foreign currency, to perform trading in equities or other asset classes from overseas or either are trading currencies with the aim of making a profit from market changes.
- 4. Banking institutions that exchange money to service their clients or to lend money to overseas clients.
- 5. Governments or central banks that either buy or sell currencies and try to adjust financial imbalances, or adjust economic conditions.
What are Majors in Forex Trading?
In forex trading, some currency pairs are nicknamed majors (major pairs). This category includes the most traded currency pairs and they always include the USD on one side.
Major pairs include: EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, NZD/USD
What are Minors in Forex Trading?
In forex trading, minor currency pairs or crosses are all currency pairs that do not include the USD on one side.
What are Exotics in Forex Trading?
In forex trading, exotic pairs include the less traded currency pairs that include a major currency paired with the currency of a smaller or emerging economy. These pairs usually have less volatility, less liquidity and do not present the dynamic behavior of major pairs and crosses.
Source - XM.com