What is forex trading and how does it work?

forex trading

Recently, trading Forex was mainly done by large financial corporations, institutions, and central banks as well as very wealthy individuals and hedge funds. However, with the Internet boom, everything changed and it is now easy for your average investor to buy and subsequently sell currency with a simple click with online accounts and brokerages.

The fact that people need to exchange currency is the main reason why the Forex market is huge and the most liquid market on the globe. Even the stock market dwarfs in comparison. A unique aspect is that there isn’t a central market place for Forex. Currency trading is fully over-the-counter but electronically. The market is open 24 hours a day for 5.5 days a week for trading. Price quotes, therefore, change constantly.

Trading is done with currency pairs that move under 1% a day, so it is not a very volatile market. For this reason, many currency traders rely on big leverages such as 250:1. Some of the most popular currency pairs are USD/GBP, USD/EUR and GBP/EUR. First of all, an investor needs to decide which pair to trade. The base currency is the one that appears first in the pairing, the quote currency, or the one that you are buying, is the second currency in the pairing.

Next a person needs to decide on the type of Forex trade they want to take place as well as deciding if they are going to buy or sell a currency. An investor buys a currency that they believe will increase in value then sells it later to reap the profits of that exchange, minus any fees. A currency quote always has a spread. This is the difference between the buy and sell prices of the currency. A trader monitors the trade and then closes it when they decide the time is right.