If you look back at the history of forex trading, only finance institutions, professional traders were involved in foreign exchange. Now because of the large number of brokerages and online forex trading services, people coming from non-financial backgrounds are also attracted to the forex market. The growing popularity and high liquidity play a vital role in mainstream participation in foreign exchange.
Forex trading or foreign exchange is considered as the kind of investment to get higher returns by taking the advantage of differences and fluctuations of global currencies. The forex market is the market in which the exchange of foreign currencies takes place. It is the largest market in the world. If you are looking to invest in forex assets, you must know that foreign exchange involves currency pairs to trade.
What is Forex Trading?
Forex trading is the process of transferring currencies within a network of buyers and sellers at an agreed price. The exchange of these currencies is equally important because of foreign trade or the transfer of goods and services across borders.
Forex trading is the process of transferring currencies within a network of buyers and sellers at agreed price. How does forex trading work? Best Currency pairs
Foreign exchange is not only done for the purpose of earning profits, but it has some practical implications also like companies and banks need to convert one currency into another in order to provide service to their international clients and for various other reasons. It is also done while you travelling abroad. People who have travelled abroad are likely to have made forex transactions.
The currencies being converted every day results in high price movements and create high volatility. Forex traders make profit by taking advantage of this volatility. There is no physical exchange of currencies in forex trading unlike in stock trading. In forex trading, all currency pairs are traded over the counter (OTC). There is no centralised exchange associated with forex trading. Traders monitor their transactions on a computer network.
The network of forex traders has the majority of institutional traders, fund managers, MNCs, banks and financial institutions. There is no involvement of any physical possession of currencies, traders just keep their eyes on exchange rate fluctuations and speculate or hedge against these fluctuations.
The forex industry’s value took a big leap from $1.934 quadrillion in 2016. So, investment in the market is huge and getting bigger by the day. It is pouring from every country. So, the volumes that you see are surging at a rapid pace. And the market is always lively in every situation. As per 2019 figures, the daily transaction of the forex market was USD 6.6 trillion. It’s been two years, and the data has gotten bigger. These are the numbers before the pandemic struck.
PS: These are triennial reports from the Bank for International Settlements.
Now, several people have turned toward trading forex after losing their jobs. Moreover, it has proved to be the best career option or alternatives for revenues.
How does Forex Trading Work?
Forex trading is conducted directly between two parties rather than exchanges. Traders can buy currency pairs 24 hours a day because of different time zones and 5 business days a week. One can participate in forex trading remotely by internet connectivity. The Internet has made things super easy, especially in the case of forex trading as traders can easily buy and sell currency online conveniently without any involvement of a third party.
There are different categories of currency pairs on which you can trade according to the market conditions and how the nation is performing economically. The forex market has a worldwide reach to trade, because of which forex market consists of high liquidity. It is the most liquid market in the world. The reason is obvious why traders are inclining towards forex trading because it offers many opportunities to earn a good amount of returns on investment.
Forex currency pairs are high tradable assets that are quite lucrative for investors who are looking for the diversification of their portfolios.
Different types of Forex Market
There are three different categories of the forex market that traders choose according to their trading style.
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Spot Forex Market
The name itself suggests that in the spot forex market, trades are conducted on the spot. In simple words, you can trade by physically exchange the currencies within a short period of time. The spot market is the primary foreign exchange market where currency pairs go through the process of exchange on the basis of various market conditions.
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Forward Forex Market
In such type of market, trades are conducted on a contract basis where traders are agreed upon a fixed amount of currency to trade at a pre-determined price in future.
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Future Forex Market
The future forex market is very similar to the forward forex as in futures, trades are conducted on a contract basis where traders are agreed upon a fixed amount of currency to trade in future. But it is slightly different from forward forex as futures are traded on an exchange.
Best Forex Currency Pairs
Here is the list of the most traded currency pairs in the world. Traders often trade in the top three currencies mentioned below because of high liquidity and the amount of data available to monitor. You can find more information and data about USD, EUR and GBP because of their popularity and global economies.
- EUR/USD
- GBP/USD
- USD/JPY
- AUD/USD
- USD/CHF
- USD/CAD
- NZD/USD
The forex currency pair is quoted as X/Y, where the currency mentioned at left is called the base currency and the currency mentioned at right is referred to as the quote currency. For example, USD/JPY, where USD is the base currency and JPY is the quote currency.
Bottom Line
The tax and other duties we pay for exports are driven by the fluctuation of prices in the forex market. There are so many factors that can affect the price movements in foreign exchange. Several factors include economic updates, news, market sentiments can influence the market in various ways.
