A lot of people don’t know this, but FOREX stands for Foreign Exchange. The FOR stands for the first word and the EX for the second respectively. Most people think that it is a very complicated business so they never even give it a single try, but the truth is that forex trading can have a lot of benefits with genuine tradersway review about forex trading for you if you know what you are doing. That is why we are going to explain it all to you below. Keep reading.

To put it simply, forex or foreign exchange like it is called, is a group of buyers and sellers. What they do is that they buy and sell currencies with each other at prices that have been already agreed upon. And it’s not like you have not done it yourself on a simpler scale. If you have ever travelled abroad, then you must have exchanged your currency for the currency of the country that you wanted to go. Or if someone you knew was coming to your country, and you helped him convert his currency into your country’s currency.

That is the basic idea of forex trading.

Foreign exchange is usually done for a lot of practical and functional reasons, but there are also those who take part in this activity to make a profit and earn. A lot of money is converted from one currency to another, and that is the reason that you will find some currencies that are highly volatile. They experience a lot of fluctuations many times in a day. This is why foreign exchange is so appealing to many people. If you know what you are doing and you are willing to take some calculated risks, you can make a lot of money.

How do currency markets work?

You might think that forex is like shares and other commodities, but it does not happen on exchanges. Foreign exchange happens directly between two parties in what is called OTC Market, which stands for over the counter market. Whether you are in New York, Sydney, Tokyo, London, or anywhere else, you can easily trade with another as there is no main location and it can be done 24 hours a day. The above four cities are the main centers, and the market is taken care of by a network of banks and other institutes.

The forex market can be divided into three types:

1. The spot forex market

2. The forward forex market

3. The future forex market

Spot forex market

The spot forex market takes place ‘on the spot’. It means that the exchange happens exactly on the spot where the trade is settled. It usually happens within a short period of time. It refers to the physical exchange of currency.

Forward forex market

When a forward exchange happens, the two parties agreed on a contract to buy or sell a specific amount of currency at a specific price. The contract can be made at a date or a couple of dates in the future, and those can be settled about mutually.

Future forex market

The difference between a forward and a future exchange is that future currency exchange is legally binding. The futures contract is the same as the forward contract in other aspects as it happens on a specific date and at a specific rate that is established between the two parties.

Instead of taking delivery of the actual currency, most traders take advantage of forex trading by speculating on the currency prices and making predictions about the currency exchange rates.

What is a base and quote currency?

Since forex is an exchange, there are two currencies involved in every transaction. The forex traders sell one currency so that they can buy the other currency. The first currency is called the base currency, and the second currency is called the quote currency, respectively. The exchange rate is always quoted in pairs. The price of the pair can be called as the worth of one unit of the base currency with regards to the quote currency.

All the currencies that a trader can use to make a transaction with another trader are represented by a code that comprises of three letters. Usually, out of those three letters, the first two letters represent the region, and the last letter represents the name of the currency. For example, GBP refers to the Great British Pound, and similarly, the USD stands for the United States Dollar.

To keep things ordered, most traders place pairs into the following categories:

Major pairs

This category holds the currencies that are used the most; in fact, they are responsible for almost 80% of all the transactions that happen in the market. These include the EUR/USD pair, the USD/JPY pair, GBP/USD pair and the USD/CHF pair.

Minor pairs

The currency pairs that are not traded so often have been categorized in this group. These could be minor currencies or the major currencies that are not paired with the United States Dollar. For example, EUR/GBP, EUR/CHF, GBP/JPY, etc. These are traded less frequently as the major pairs.

Exotics

This pair is made up of a major currency that is traded against a small or emerging currency like USD/MXN, USD/PLN, EUR/CZK, etc. These transactions are done even less than the minor pairs.

Regional pairs

These currency pairs are combined according to specific regions like Australia. These can include transactions like EUR/NOK, AUD/NZD, AUD/SGD, ETC.

What moves the forex market?

Traders make up pairs of currencies that are from all around the world. This makes predicting their rates very challenging. There are a wide variety of reasons that can affect the price movements of these currencies. If you want to become a successful forex trader, you have to know these factors, especially the major players that contribute to the volatility of the market.

Central banks

Obviously, the supply of the currency is controlled by the central banks, no matter which country they belong to. These banks come up with measures that can have a considerable impact on the currency’s price as well as the exchange rate.

News reports

Most investors, as well as commercial banks, try their best to look for a strong economy so that they can put their capital into it. The thing that affects the economy more than anything else in the news. If good news hits the market about a certain country or a region, that will tell the investors that the economy for the region is strong and getting stronger, so they increase their transactions for the economy.

Conclusion

If you keep your eye on the above things as well as other factors that can affect an economy, you too can become a forex trader and delve into the market of foreign exchange.