What is forex trading and how does it work

What is forex trading and how does it work?

Forex market is a decentralized global market in which all currencies are traded against each other, and traders realize profits or losses from currency value changes. Forex Market is also known as Forex, FX, or Forex Exchange Market.

ALSO READ: Top 5 SA Self-Made Richest Celebrities Through Forex Trading

Forex Market History

The history of the Forex Market is marked by two particular events, putting a deep stamp on its formation and development. These two historical events are the creation of the Gold Standard System and the Bretton Woods Agreement.

Gold Standard and Bretton Woods Agreements

The Gold Standard system was formed in 1875. The main hidden idea was the government’s guarantee that the currency would be backed by gold. All major economic countries have defined the amount of money to one ounce of gold as the value of their currencies in terms of gold and the ratios (ratio) of these amounts have become the exchange rates of these currencies. This marked the first standardized means of exchange in history. However, the First World War caused a break in the Gold Standard system, as countries were busy following up economic policies through the Gold Standard’s fixed exchange rate system.

In July 1944, more than 700 representatives of Allied countries stressed the importance of a monetary system that would fill the gap left behind the gold standard. They organized a meeting in Bretton Woods, New Hampshire, to put in place a system called the Bretton Woods system of international monetary management. The creation of the Bretton Woods system led to the formation of fixed exchange rates as the United States defined the value of the US dollar in terms of gold equal to $ 35 for an ounce and other countries pegged their currencies to dollar. The US dollar has become the main reserve currency and the only currency that has been supported by gold. However, in 1970, the US gold reserves were so depleted that it was impossible for the US treasury to cover all the reserves held by foreign central banks.

In August 1971, the United States announced on the gold exchange changes for the US Dollar, which the central banks had under in reserve. It was the end of the Bretton Woods system and the beginning of the Forex Trading System.

What is a Forex Market?

The foreign exchange market, also known as the “Forex” or “Fx” market, is a decentralized global market where currencies are traded and traded. There is no centralized market where transactions are made. Rather, Forex trading is done electronically over-the-counter (OTC- over-the-counter), which means that all commercial transactions are done through the computer by traders and other market participants in the world.

The foreign exchange market is the largest financial market in the world where average daily turnover (daily turnover) is growing steadily. The daily turnover of conversion transactions in the world is estimated at $ 4 billion, of which 80% is based on speculative transactions with the intention of gaining trading profit from exchange rate differences.

This type of market means that the liquidity of the market, the volume of buying and selling that occurs at a given moment, is extremely high. This is a very important factor that makes it easy to buy and sell currencies, and especially from an investor’s point of view, to determine the ease with which the price of the currency can change over time. a certain period.

How to trade the Forex Market

The trade that takes place on the Forex market involves simultaneously buying one currency and selling another. This is because the value of one currency is relative to the other currency and is determined by their comparison. From a trader’s point of view, Forex trading is speculating on the value of one currency over another.

Each currency pair can be thought of as a unit consisting of a “base currency” (the first currency) and a “counter currency” – the quotation (the second currency) that can be bought or sold. This phenomenon shows the need for quotations in the purchase of basic currencies. Thus, in the EUR / USD currency pair, EUR is the base currency, while USD is the quote. If you expect the price of the euro to increase against the US dollar, you can buy the EUR / USD currency pair. When buying a (long-term) currency pair, the base currency (EUR) is purchased, while the quotation (USD) is sold. Thus, you buy the EUR / USD currency pair at a lower price and then sell it at a higher price and, therefore, make a profit. If you expect the opposite situation, you can sell the currency pair (go short), which means selling the euro and buying the US dollar.

However, the risk is still there. If you buy the euro against the dollar, hoping that the euro will increase in price, but instead of the US dollar strengthening, you will suffer losses. So, besides the profit you can make from trading, you should always consider the risk involved in the trading.

As you can see the Forex market is not so complex to understand and not so dangerous to enter. You can become one of its participants in minutes and start making money more easily. How to learn Forex Trading and specifically how to use the online trading platforms that are presented on our website. You can read our educational materials and e-books, which can help you understand the nature of Forex trading, discover profits, learn how to trade and control your risks.

Forex Market Hours

The foreign exchange market is extremely active all day long with prices constantly changing. It’s the only market that really works 24 hours a day, five days a week. Currencies are traded in the largest stock markets and around the world. in Zurich, Hong Kong, New York, Tokyo, Frankfurt, London, Sydney and Paris. This means that in almost all time zones the market is active – when the market closes in the US, the trading day starts in Tokyo and Hong Kong.

The flexibility of time is very convenient for traders who have a busy work schedule. They do not need to worry about market opening and closing hours and are free to organize their trading when they want.

Forex Market Participants

Forex is made up of different participants, also called Forex Market Participants, who trade in the market for different reasons. This means that participation in Forex trading is not just for speculative purposes. Each of the participants plays its role in the market offering their integrity and stability.

Main participants of the Market are:

  • Government and Central Banks
  • Banks and commercial enterprises
  • Hedge funds
  • Brokerage companies
  • investors
  • Forex Trading Detail
  • speculators

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