What is forex trading?
When trading forex you always sell one currency Forex trading is a medium through which one currency is exchanged for another currency. When trading forex you always sell one currency pair and buy another currency pair. Currency pair and buy another currency pair.
Each currency in the pair is listed as a three-letter code, consisting of two letters that stand for the region and one for the currency. For example, USD stands for US Dollar and JPY for Japanese Yen. In the USD/JPY pair, you sell Japanese yen and buy US dollars.
Some of the most traded FX pairs are Euro vs. US Dollar (EUR/USD), Euro vs. British Pound (GBP/EUR), and British Pound vs.
US Dollar (GBP/USD).
To keep things in order, most providers divide pairs into the following categories:
Four types of forex pairs:
Major Pairs - The seven currencies that make up 80% of global forex trading. Includes EUR/USD, USD/JPY, GBP/USD and USD/CHF
Secondary pairs – less frequently traded, these often show major currencies against each other rather than the US dollar. Includes: EUR/GBP, EUR/CHF, GBP/JPY
Exotics pair – a major currency against one of a small or emerging economy. Includes: USD/PLN, GBP/MXN, EUR/CZK
Regional pairs classified by region include: EUR/NOK, AUD/NZD, AUD/SGD
Most forex transactions involve banks or individuals trying to buy a currency that will appreciate in value against the currency they are selling. However, if you ever convert one currency to another, for example, while traveling, you have made a forex transaction.
How does forex trading work?
Institutional Forex trading takes place directly between two parties in the over-the-counter (OTC) market. This means there is no centralized exchange (like the stock market), and the institutional forex market is instead managed by a global network of banks and other institutions.
There are four main areas during the transaction. For example, New York, Sydney, London, and Tokyo, since there is no centralized location you can trade forex 24 hours a day.
Most traders speculating on forex prices do not accept currency supply. Instead, traders will forecast exchange rates to take advantage of price movements in the market. The most popular way to do this is to trade derivatives, such as a rolling spot forex contract offered by IG
Trading derivatives allows you to speculate on the price movements of an asset without owning that asset. For example, when trading forex with IG, you can predict which direction the price of a currency pair will go. How accurate your prediction is determines your profit or loss.
Three different types of forex markets:
There are three different ways to trade in the forex market: spot, forward and future.
Spot Forex:
The physical exchange of currency pairs, either at the time the trade is settled short notice. Derivatives based on the spot forex market are offered over-the-counter by dealers such as IG.
Forward Forex:
An agreement to buy or sell a specified amount of currency at a specified price and to settle on a specified date in the future or within a range of future dates.
Forex Futures:
An exchange-trade contract to buy or sell a specified amount of currency at a specified price and date in the future.
Forex Pricing Base and Quote Currency.
The first currency listed in Forex is called the base currency and the second currency is called the quote currency. The value of a forex pair is the price of one unit of the base currency in the quote currency.
GBP/USD
base currency,
the currency you are buying
when you trade the forex pair
quote currency,
or the currency you are selling
when you trade the forex pair
Example, USD is the quote currency. GBP is the base currency.If GBP/USD trades at 1.35352, then one pound is worth 1.35352 dollars.
If the pound rises against the dollar, the pound will appreciate against the dollar and the pair will rise. If you read it, the price of the pair will go up. So, if you think that the base currency of a pair is likely to strengthen against the quoted currency, you can buy the pair. If you think it will be weak, you can sell the pair.