What is Forex trading? Complete Beginners Case Study

  • By: Joseph Benson
  • Time to read: 7 min.

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What is forex trading? Forex, also known as foreign exchange, is a network of buyers or sellers who trade currency at a fixed price. Forex is how individuals, businesses, and central banks convert currency between each other at a fixed price.

If you’ve ever traveled abroad, it is likely that you have done a forex transaction. Although some currency exchange can be used for practical reasons, most currency conversions are done with the intention of making a profit. 

Some currencies can experience volatile price movements due to the volume of currency that is converted each day. Forex traders find this volatility attractive because it increases the chance of high profits and decreases the risk.

What is Forex trading?

How does the currency markets works?

Forex trading is not like commodities or shares. It takes place directly between two parties in an over-the counter (OTC) market, and does not occur on exchanges. A global network of banks manages the forex market.

They are located in four major forex trading centers, each with their own time zones: London (New York), Sydney (Sydney) and Tokyo (Tokyo). Forex trading is possible from any location as there is no central point. All day, every day.

There are three types of forex markets:

  • Spot forex market: The physical exchange of currency pairs, which occurs at the exact moment the trade is settled.
  • Forex market for forward a contract to purchase or sell a certain amount of currency at a specific price. The transaction is to be settled at a future date or range of future dates.
  • Future forex market a contract to buy or sell a certain amount of currency at a fixed price and date in the near future. A futures contract, unlike forwards, is legally binding

Most forex traders who speculate on currency prices won’t plan to take delivery of it; they will instead make exchange rate predictions in order to profit from price movements.

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What is Forex trading?

What is a quote and base currency?

The base currency is the currency that is listed first in a forex pair. The quote currency is the second currency. Forex trading involves the sale of one currency to purchase another. This is why they are quoted in pairs. The price of a forex pair shows how much one unit is worth in the quote currency.

Each currency is listed as a 3-letter code. This usually consists of two letters representing the region and one for the currency. USD, for example, is a currency pairing that includes buying the Great British Pound and selling it.

In the following example, GBP is the base currency while USD is the quote currency. One pound equals 1.35361 dollars if GBP/USD trades at 1.35361.

A single pound of pound will have a greater value than a dollar if it rises. The pair’s price will also increase if the pound is higher against the dollar. The pair’s value will drop if it falls. 

If you believe that the base currency of a pair will strengthen against the quote currency you can purchase the pair (going short). You can also sell the pair if you believe it will fall (going short).

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What is Forex trading?

Most providers divide pairs into one of the following categories to keep things organized:

  • Major pairs there are seven currencies that account for 80% of forex trading worldwide. Include EUR/USD and USD/JPY as well as GBP/USD and USD/CHF.
  • Pairs of minors these are less traded and often feature major currencies against one another instead of the US Dollar. Include: EUR/GBP and EUR/CHF.
  • Exotics A major currency against one of a smaller or emerging economy. Included: USD/PLN (US Dollar vs Polish Zloty), GBP/MXN(Sterling against Mexican peso), EUR/CZK
  • Pairs regional. Pairs are classified by region, such as Australasia or Scandinavia. Included: EUR/NOK (Euro against Norwegian Krona), AUD/NZD, Australia Dollar vs New Zealand Dollar), AUD/SGD

What drives the forex markets?

Because the forex market includes currencies from around the globe, it can be difficult to predict exchange rates as many factors could influence price movements. Forex is driven primarily by supply and demand like other financial markets. It is therefore important to understand the factors that drive price fluctuations.

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What is Forex trading?

Central banks

Central banks control supply and can announce measures that have a significant impact on the currency’s value. Quantitative easing is a method of injecting money into an economy. This can lead to a drop in the currency’s value.

News reports

Investors and commercial banks tend to invest in economies with a positive outlook. If positive news is released about a region, it can encourage investment and boost demand for its currency.

If there isn’t a simultaneous increase in demand for the currency, its price will rise. A piece of bad news can also cause currency prices to drop and decrease. Because currencies reflect the economic health of the region, they are often more expensive.

Sentiment of the market

Market sentiment, often a reaction to news, can play a significant role in driving currency prices. If traders believe that a currency will move in a particular direction, they will trade accordingly, and others may follow their lead, increasing or decreasing the demand.

What is Forex trading?

Economic data

For two reasons, economic data is essential to currency price movements: it provides insight into the central bank’s next steps and gives an indication of how the economy is doing.

Let’s say, for instance, that inflation has risen beyond the 2% target that the European Central Bank is trying to maintain. Inflation is the main policy tool of the ECB.

Therefore, traders may start to buy euro in anticipation of rising rates. EUR/USD could experience a price rise as more traders want euros.

Ratings for credit

Investors seek to maximize the return from a market while minimizing their risk. Investors will consider credit ratings and economic data when deciding where to invest.

The country’s credit rating, which is an independent evaluation of its ability to repay its debts, is an indicator of its financial strength. A country with a high credit score is considered safer for investment than one that has a low rating. 

This is especially true when credit ratings are downgraded or upgraded. An improved credit rating could lead to a country’s currency increasing in value, and vice versa.

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What is Forex trading?

What is forex trading?

Although there are many ways to trade forex, they all work in the same way. You can simultaneously buy one currency and sell another. Forex transactions were traditionally done through a broker. However, online trading has made it possible to take advantage of price movements in forex using derivatives such as CFD trading.

CFDs can be leveraged products that allow you to open positions for only a fraction the total value of the trade. You don’t own the asset like non-leveraged ones, but you can take a position on the future value of the market.

Leveraged products can increase your profits but they can also make it more difficult to lose if the market is against you.

Although it can increase your profits, there is also the possibility of increased losses, including those that could exceed your margin. It is therefore crucial to understand how to manage your risks when trading leveraged.

What is Forex trading?

What is margin in forex?

Leveraged trading is incomplete without margin. Margin is the term that describes the initial deposit that you make to open and maintain leveraged positions. Remember that margin requirements can change depending on the broker you use and the size of your trades.

Margin is typically expressed as a percentage or the total position. For example, a trade on EUR/GBP might require only 1% of the total position value to be paid to open. Instead of depositing AUD$100,000., you would only need to deposit AUD$1000.

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What is a pip?

The units that measure the movement of a forex pair are called pip. A forex pip is often equivalent to a one-digit change in the fourth decimal position of a currency pair. If GBP/USD moves to $1.35361.33 to $1.3537If it moves a single pip, then it is 1. Fractional pips are sometimes called pipettes.

This rule is not applicable to smaller denominations of quote currency, such as the Japanese yen. A movement in the second place of the decimal place is a pip. If EUR/JPY moves starting at Y=106, then that is a single pip.452 to Y=106462. It has moved one pip again.

Conclusion

The world of currency trading is not the easiest to get into, but it is a very rewarding field. because of this, it can be difficult for someone who is just starting out to know where to go from here.

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When starting in Forex trading, it is important to understand what Forex trading is and who should be involved so as to stay safe. In order to do this, you need to know what goes on within the Forex trading world.

Forex trading is a very popular way to make a trading career for our economic lives. It allows trades between people and their countries by exchanging goods and services between them. The whole transaction that occurs without a face-to-face conversation.

It’s no secret that millions of people across the world have turned to Forex trading for financial gain — and for good reason. With relative ease and a bit of a learning curve, you can make serious money with Forex.

There is a whole new financial world at your fingertips; it’s up to you whether or not you want to take it. Good luck!

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What is Forex trading? Complete Beginners Case Study

Joseph Benson

Hi my name is Joseph Benson, I have been trading forex for more than 13 years now and I am still trading actively. Learn how to trade easily by following my blog

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