What is Forex Trading?
Forex trading is short for “Foreign Exchange” trading. Forex trading is buying and selling fiat currencies in order to make profits. The forex market is known as the biggest financial market in the trading world, with trillions of dollars in daily trading volume.
Forex traders buy and sell currency pairs, such as EUR/USD, or USD/JPY and GBP/USD, in order to profit from changes in the exchange rates between those currencies. Traders can make money in forex trading by buying a currency pair when they think its price value will surge and selling it when they know its value will plunge.
For example, if a trader believes that the euro will strengthen against the US dollar, they might pick a currency pair such as EUR/USD. If exchange rate increases, the trader can sell the currency pair at a profit.
Forex trading is generally done through a broker (physically) or trading platforms online that provide access to the forex market. Traders can choose from a variety of trading strategies, including technical analysis, fundamental analysis, and automated trading using algorithms.
Understanding Forex Trading Pairs
In forex trading, a trading pair refers to two currencies that are being transacted against each other. A trading pair is also known as a currency pair.
Each currency in the trading pair is represented by a three-letter code, such as EUR for the Euro, USD for the US dollar, GBP for the British pound, and so on. The first currency of a trading pair is called base currency, whereas second currency is known as the quote currency.
The exchange rate between the two currencies in the trading pair determines the value of the base currency in terms of the quote currency. For example, if we are trading EUR/USD trading pair, the current exchange rate might be 1.2000, which means that one Euro is worth 1.2000 US dollars.
Forex trading involves trading currency pairs, which means that one currency is bought while another currency is sold at the same time.
Trading pairs can be categorized as major, minor and exotic depending on the liquidity and trading volume of the currencies involved.
The most commonly traded currency pairs are known as major currency pairs, which include EUR/USD, USD/JPY, USD/CAD, USD/CHF, GBP/USD, NZD/USD and AUD/USD. These major currency pairs account for the majority of forex trading volume.
Minor currency pairs, also known as cross-currency pairs, do not comprise the US dollar. Examples of minor currency pairs involve EUR/GBP (Euro/Great British Pound) and AUD/JPY (Australian Dollar/Japanese Yen).
Exotic currency pairs involve one major currency and one currency from a developing country. These pairs tend to have wider bid-ask spreads and lower liquidity compared to major currency pairs. Examples of exotic currency pairs include USD/MXN (US Dollar/Mexican Peso) and EUR/TRY (Euro/Turkish Lira).
Forex trading offers several uses, including:
Forex trading can be used to hedge against currency risk. For example, if a company has foreign currency exposure due to overseas operations, it can use forex trading to manage its currency risk by taking positions in currency pairs that offset its exposure.
Forex trading can be used to speculate on the direction of exchange rates. Traders can buy or sell currency pairs based on their expectations of future exchange rate movements, with the aim of making a profit.
Forex trading can be used as an investment vehicle, allowing investors to gain exposure to the forex market and potentially earn a return on their investment.
As for the common platforms for forex trading, there are many online brokers and trading platforms that offer access to the forex market. When choosing a forex trading platform, it’s important to consider factors such as the platform’s features and tools, the broker’s reputation and regulatory status, and the trading costs and fees.