What Is Forex Trading And How Does It Work?

3 mins read

Currency trading occurs on a global decentralised or over-the-counter market called the foreign exchange market. Each currency’s exchange rate is determined by this market. Currency exchange involves buying, selling, and exchanging currencies at current or determined prices.

What is Forex Trading?

Trading currencies is a method of making money by speculating on their value. When a trader exchanges one currency for another, he is speculating on whether one currency will rise or fall in value against another. Forex trading can make you wealthy if you are a hedge fund with deep pockets or an exceptionally skilled currency trader. Retail traders, however, may find forex trading to be more of a rocky path to huge losses and potential poverty than a road to riches. Even beginners with little experience can find forex a desirable market for several reasons. To participate in the forex market, traders need only deposit a small amount of money. Additionally, the market is open 24 hours a day, 5 days a week (it is closed on weekends for a short time).

What is the Forex Market?

Currency exchange takes place on the foreign exchange market. Currency plays an important role in local and international trade because it enables us to purchase goods and services. To do business abroad, we must exchange international currencies.

It is unique in this international market that foreign exchange does not operate in a central marketplace. Trading in currency takes place over the counter (OTC) rather than on a centralised exchange, which means that all transactions take place via computer networks between traders across the globe rather than at one exchange. The market operates twenty-four hours a day, five and a half days each week, and currencies are traded in Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo, and Zurich in every time zone. Thus, when the U.S. trading day concludes, the forex market begins anew in Tokyo and Hong Kong. This is why the forex market can be extremely active at any time, with price quotes constantly changing.

How does Forex Trading work?

Speculating on currency exchange rates to profit from them is what forex trading is. Since currencies are traded in pairs, traders speculate on whether one currency will rise or fall in value against another by exchanging one for the other.

As opposed to shares or commodities, forex trading takes place directly between two parties in an over-the-counter (OTC) market, rather than on exchanges. There are four major forex trading centres in different time zones, spread across a global network of banks: London, New York, Sydney, and Tokyo. Due to the lack of a central location, trading forex is possible 24 hours a day.

The forex market is categorised into three types:

  • Spot forex markets are physical exchanges of currency pairs that take place right when the trade is settled, i.e., ‘on the spot.’
  • Forward contracts are sales or purchases of a given amount of currency at a specific price at a future date.
  • Futures forex market: an agreement to buy or sell a certain amount of a given currency at a fixed price and date in the future. Futures contracts have legal validity, unlike forward contracts.

Traders who speculate on forex prices do not intend to take delivery of the actual currency; instead, they predict exchange rates to profit from price movements in the market.