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What is Forex and the Different Ways to Trade Forex ?

What is Forex Trading and How Does It Work?

what is forex and how does it work“What is forex?” common question every newbie wants to know when they hear about foreign exchange. Forex is also known as foreign exchange, which is a marketplace where anyone can exchange or trade international currencies. Forex trading is the ultimate process of buying or selling foreign currencies, such as dollars, euros, yen, etc. These currencies are traded through the international currency markets, which are a global network of financial institutions, banks, brokers, and other financial companies that deal with foreign currency exchange.

In the forex market, it accepts all kinds of currencies available in the world. And it holds the highest liquidity in forex. However, in terms of cash and transactions and liquidity in forex, it is one of the largest marketplaces in the world.

For your information, Forex doesn’t have any physical location, and all the transaction is done using the electronic network. Therefore, anyone can trade it from anywhere around the world.

Let’s give you an example; imagine you are traveling to Australia from India; the first thing which you will do after landing at Australia Airport is to exchange your INR currency with the Australian Dollar. Or you can do that before flying. Most of the time, you can exchange through a currency conversion booth. It will do the needful by charging the currency conversion rate.

However, the conversion rates are not fixed, and these rates keep changing as per the market stats. This process is also the same for online forex trading platforms.

The process is simple; traders generally invest in a high currency, and once rates of conversion change on the positive side, they sell the currency. This highly popular marketplace trades around 6.6 trillion USD per day, which is the highest one on the planet.

Forex Market Size and Liquidity in Forex

The foreign exchange market size is the largest and it is most liquid market in the world. Over $6 trillion worth of transactions is executed each day. The forex market is open 24 hours a day, 7 days a week, and includes thousands of brokers exchanges from which traders can make trades.

Forex is considered one of the unique marketplaces where all kind of currencies gets traded. This market liquidates the cash flow of trillions of dollars daily and yet does not has a physical location or an exchange center. All its transactions happen virtually, and this currency market runs round the clock with a threaded secured network.

The forex market is solely running on electronic transactions, and because it gives ease that anyone can trade on this platform with the help of the internet.

Unlike other exchanges like the New York Stock Exchange, Forex Market is one that trades in all currencies. However, Dollar is the most preferred and transacted one, which dominates around 80-85% of all transactions. At Forex, traders can trade as per their will and current trading statistics.

Liquidity in forex means, the ability of a currency pair or asset or currency to be bought and sold quickly and at a reasonable price.

Liquidity in forex depends on the FX market size and volume of transactions, the spread between buying and sell prices, and the number of participants in the market. Further, the more liquid an asset, the more easily it can be traded.

What is Traded in Forex?

What Is Traded In Forex Trade?The short and crisp answer is ‘Money,’ in other words, currency. Forex or FX is the biggest currency exchange marketplace. It runs on an electronic medium and converts one currency into any other one. It is the mathematics of buying a country’s currency.

When a person buys a few dollars in exchange for Yen (Japanese currency), he is actually investing in the United States economy. But the outcome depends on the current statistics and the trader’s knowledge. If the US is doing good, the conversion value will earn him profit after a particular time.

You already know that forex trading is a worldwide popular marketplace where people invest in other countries’ currencies. Traders buy and sell them. They repeat the process once their price value increases again.

For example, buy INR (Indian National Rupee) in exchange for USD (United States Dollar) and then wait (using the converted amount as stock). Once the value of USD increases, the sale of the bought amount will provide the principal + profit amount to the seller.

One of the highest traded currencies in the forex market is the USD. However, Euro, Pound, and Yen also follow the pathway. Forex allows everyone to invest and exchange their money and generally transact through online platforms. People often get confused about this as it takes some time to understand that one is investing money to earn more of it.

Learn How to Trade Forex

Forex trading is a highly complex and technical thing to do. If you want to be successful, it’s important to have a good understanding of how the forex market works.

Step 1: Find the right broker

Some brokers are better than others. Make sure that you find one that is reputable and has a good reputation. Once you have found your desired best forex broker, open an account. We will discuss the ways to find the right broker later in this article.

Step 2: Understand the Market

Understanding the market is very important in forex trading. It will help you make better trades and understand the market situation. The first thing to do is to read about the market. Understand how to predict and what is happing in the market and what will happen. Understand the different types of markets and how they work.

You can understand the market using charts, news, indicators, and more.

Step 3: Understand Currency Pairs

There are two types of currencies: fiat currencies and non-fiat currencies. Fiat currencies are usually have support from the government. Examples of fiat currencies are US dollars, euros, and British pounds. Non-fiat currencies are currencies that are not backed by a government. Examples of non-fiat currencies are gold, silver, and oil.

Since you can trade fiat currencies as well as non-fiat currencies, select the currency pair you want to trade by checking the currency pairs list. However, beginners and most traders trade popular currency pairs such as EUR/USD, USD/JPY, and GBP/USD. Among these best forex pairs to trade is EUR/USD, and it is the most traded currency pair.

Step 4: Technical and Fundamental Analysis

Technical analysis is a way to analyze the market based on price movements. Technical analysis is very useful when trading. It helps you predict the upcoming market trend.

Fundamental analysis is a way to analyze the market based on the economy. It’s useful for short-term trading. Fundamental analysis can be used to predict what’s will happen in the future or near future.

Step 5: Trade

Once you’ve learned all of this, it’s time to trade. Start trading in a small amount of money and see how it goes. You may want to use a demo account first. If you do decide to go to a real account, make sure you have some money saved up first.

Step 5.1: Pick Your Position

The rule of thumb in forex trading is you will buy a currency and sell them later to gain profit. And this process repeats all the time. So, you can take two positions in forex trading, buying position and a selling position.

Buy Position

In forex trading, a buy position is a trade where the trader enters into a position to buy a currency or commodity. The objective of a buy position is to purchase the currency or commodity at a lower price than the current market price and then sell it at a higher price.

Sell Position

A sell position is a trader’s initiative to sell a particular currency pair in order to induce the buying of the same currency pair by the other party. However, you will want to make a profit or reduce the loss using the selling position. So, the selling start price and stop price should be set according to the trader’s analysis and determined beforehand.

Entering A Buy Position

Suppose the current EUR/USD price is 1.33820/840, and you know Euro is strong. So, you decide to take a buy position for EUR/USD. Hence, your buying position is entered at 1.33840.

Now, let’s think the price of EUR/USD increased to 1.34160/180. Hence, your holding position gained 32 pips. You can sell your currency at 1.34160 and earn a profit.

Entering A Sell Position

Let’s assume the Euro is bearish, and you want to sell your position. You can enter a sell position for EUR/USD. Since you are selling your position, your selling price will be 1.33820.

Step 6: Make Adjustments

If you don’t feel right about your trading position, make adjustments. You can adjust the size of your position or the number of positions you’re trading.

So, if you were looking for answer to how to trade forex. These six are the basic steps.

Buying And Selling Currency Pairs in Forex

Buying And Selling Currency Pairs-ForexAs Forex is a currency exchange market place which deals in around trillions of dollars on a daily basis. One who wants to invest and trade at different currency Pairs-Forex has to play with two kinds of currencies at a time. It is a simple thing to understand that FX trading is done with pairs of currencies only.

As a person buys currency A by selling currency B, he invests in the first one by considering the running market trend and conversion rates. The most common way to trade on Forex is by taking the assistance of dealers and trade experts.

There are various slabs or, say, kinds of buying and selling currency pairs. These pairs are available, among which the majority involve USD either in selling or buying.

For example, a person performs a trade at various currency pairs by selling Euros and buying US dollars. In this case, the person is betting on the probability that the value of the Dollar will increase against Euros. When the conversion rate is most suitable for him, he’ll again sell the USD in exchange for Euros. Thus, he will make a profit.

Various currency pairs such as ‘major currency pairs,’ ‘Exotic pairs,’ ‘Minor Pairs,’ and G10 currencies carry their specialty. Specific people with their interests can trade in them. Forex Market allows an individual to connect with Giant banking companies. Here, they can invest. However, the rate of conversion between currencies keeps fluctuating as per the market stats, making it a sort of tug of war between them.

Forex Major Pairs

EUR/USD, USD/JPY, GBP/USD, and USD/CHF are known as the forex major pairs as they are the heaviest trading pairs in Forex.

Exotic Pairs

It is one of the most volatile forex pairs. It is risky because of the low trading volume. Some of the examples of exotic pairs are USD/ZAR, USD/MXN, USD/TRY, etc.

What is the Best Forex Platform?

Which platform is the best for you depends on your needs and preferences. Some key factors to consider when selecting a forex platform include how user-friendly it is, the number and variety of tools and features available, the trader support available, and the fee structure.

Some of the most popular forex platforms include MetaTrader 4 (MT4) and MetaTrader 5 (MT5)

MetaTrader 4 and MetaTrader 5 are two of the most popular trading platforms on the market. They are both versatile and feature-rich, allowing traders to execute a variety of strategies with ease. They offer a variety of features, including scalping and hedging, that make them ideal for experienced traders. Both of the platforms are available on Android, iOS, Windows, macOS, and Linux.

Different Ways to Trade Forex

Forex Market Size And LiquidityNow that you know what Forex is and what its advantages are, here is an insight into different ways to trade on this largest platform. Though the forex platform appears to be giant and complex, its trading ways are very simple. Some of the ways you can prefer to trade on Forex are-

Currency Futures – Currency Future is a contract that specifies the price at which one currency will be bought or sold for another currency on a future date. The information on transactions and prices is easily available as the currency’s future trading always occurs on a centralized exchange.

Currency Options – When you are considering investing in currency options, it is important to understand the different types of forex options. There are two main types of currency options: Calls and Puts.

A call option gives the buyer the right, but not the obligation, to buy a security at a set price within a certain time period. A put option gives the buyer the right, but not the obligation, to sell a security at a set price within a certain time period.

So the FX options method gives the buyer the right currency options, without any obligation, to sell or buy a specific currency at a specified rate on or before a particular date. However, traders should keep in mind the fact that for certain currency options, the trading hours limit, lowering their liquidity chances.

Currency ETFs – These are the latest additions to the ways of trading on FX. ETF stands for Exchange Traded Fund. Certain financial entities manage ETFs. These financial entities buy and hold the currencies in a fund. Later, they offer their shares to the public.

Some of the best currency ETFs are iPath® EUR/USD Exchange Rate ETN, Invesco CurrencyShares® Canadian Dollar, and WisdomTree Chinese Yuan Strategy ETF. Apart from these, there are some multi currency ETFs also available. Multi currency ETFs allow investors to gain exposure to different currencies by investing in an underlying basket of securities that track the performance of a multi currency index.

Spot Forex Market – Spot FX or the Forex Market is a financial trading platform where traders can buy and sell currencies at a fixed price. Forex spot trading is a type of derivative, which means that it’s a contract that allows you to buy or sell a specific amount of a currency at a specific price at a specific time in the future.

Different Types of Trading Strategies

There are many different forex trading strategies available to traders, but the most popular ones are scalping, day trading, swing trading, and position trading.

Scalping: It is a short-term trading strategy. It involves buying and selling currencies at very small intervals, and it’s typically used for making quick profits.

Day trading: It is also a short-term trading strategy. It involves using the price fluctuations of the currency market to make a profit. Using the day trading strategy, traders tend to hold the position for a maximum 1 day and never hold the position overnight.

Swing trading: Swing is mainly a short to medium-term strategy in forex trading. It involves buying and selling currencies in a larger number of intervals than in scalping and day trading, but it’s not as frequent.

Position trading: It is a long-term trading strategy. It involves buying or selling currencies based on your own analysis of the currency market.

As we have discussed the basics of Forex, by now, you should understand what is forex trading all about. In one sentence, forex trading is a type of financial trading where traders try to predict whether or not the value of one currency will rise or fall against another currency.

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