What is forex trading?
Summary: An abbreviation for Foreign Exchange, "forex" is the buying and selling of one currency in exchange for another.
What is forex?
Forex transactions are carried out by central and retail banks, corporations, hedge funds and individual investors. They take place in the foreign exchange market, which is the largest and most liquid market in the world, with daily trades amounting to trillions of dollars.
Forex is traded any time one currency is exchanged for another. This can happen on a large scale, when corporations do business with other corporations from abroad, or on a small scale, when an individual travels overseas and exchanges money at the airport for local spending.
What is forex trading?
With an array of currencies being traded every day, the exchange rate between currencies in the forex market fluctuates constantly.
In forex trading, retail traders aim to take advantage of this volatility in the forex market, and they participate in trading with the goal of turning a profit. Forex traders try to make market predictions with various tools and strategies, such as fundamental and technical analysis.
In this manner, forex trading is similar to stock trading. Stock traders aim to make profits based on stock market forecasts and fluctuations. They attempt to purchase a stock when it is undervalued and they predict its price will rise, and they sell a stock when it is valued higher and they predict its price will fall. Forex traders take a similar approach, purchasing a currency when they predict its exchange rate will rise, and vice versa.
Run by a global network of banks around the world, there is no central location for the foreign exchange market. Rather, the electronic marketplace is driven by four local sessions worldwide: Sydney, Tokyo, London, and New York. Each session runs from morning to evening five days a week — from Monday to Friday — following local time.
This means that each week, the Australian session begins first. This is followed by that of the Asian session in Tokyo a few hours later, then the European session in London, and finally the North American session in New York.
Traders around the world can participate in any session they wish. The forex market is closed on weekends to retail traders, but as each local session lasts for eight to nine hours a day, market hours inevitably overlap. This provides opportunities for trading 24 hours a day, for a little over five days a week.
Generally, traders stick to participating in their respective local sessions. This means that Singaporean forex traders who stick to typical hours tend to be most active during the Australasian sessions, and they contribute to the high volume of trades during this window alongside Australian and other Asian traders.
How forex trading works.
Fundamentally, forex trading is the process of buying and selling currencies. Trading takes place in an over-the-counter market, directly between two parties who have agreed on a purchase price.
Retail traders speculate on the direction of currency market prices through forex analyses methodologies such as fundamental and technical analyses. When they see potential for one currency to decrease in value and another to increase at the same time, they exchange amounts of the first currency for the second one.
Retail traders aim to profit from fluctuating price movements.
What is a currency pair?
As forex trading involves exchanging one currency for another, currencies must come in twos, making up a currency pair .
In forex, currencies are sorted into two broad categories.
Major currencies are currencies derived from the most powerful economies around the world – the US, the UK, Japan, Canada, Australia, New Zealand, Switzerland, and the eurozone. All other countries are considered minor or exotic currencies.
Currencies are expressed as currency symbols , such as USD for the United States dollar, GBP for the Great British pound, SGD for the Singapore dollar, and so on. Currency pairs are represented by putting together two currency symbols. For example, the pairing of the Singapore dollar and the US dollar is expressed as SGDUSD.
Each currency pair consists of two parts: the base currency, which is the currency on the left (SGD), and the variable currency, the one on the right (USD).
A variable currency is also known as a quote currency.
When the base currency is strengthening against the variable currency, the currency pair moves up. When the reverse happens, the currency pair moves down.
The market price of the currency pair demonstrates the price of one unit of the quote currency relative to that of the base currency. For example, if SGDUSD has an exchange rate of 0.756, it means that it costs 0.756 US dollars to buy 1 Singapore dollar.
In forex trading, traders make decisions based on predictions of these price changes.
As a trade is an exchange where traders sell one currency to buy another, they must evaluate the market price of both currencies relative to each other.
For example, a forex trader sells his US dollars for Singapore dollars because they predict that the market value of the Singapore dollar will increase relative to the US dollar. In other words, they predict that the market value of the US dollar will decrease relative to the Singapore dollar.
What types of currency pairs are there?
There are three main types of currency pairs: major, minor, and exotic.
Major currency pairs are formed when the US dollar is paired with another major currency. They are the most traded currency pairs in the forex market and account for over 80% of daily trades.
Major currency pairs can be divided into two further categories.
The ‘traditional majors’ are the first four pairings: EURUSD, GBPUSD, USDJPY and USDCHF, and the ‘commodity pairs’ are the other three pairings: AUDUSD, USDCAD, and NZDUSD.
Some major currency pairs also have their own nicknames, commonly used by forex traders.
Currency pair.