What is foreign exchange trading? Exactly what is forex? These are 2 of the most common questions asked about the topic of Forex.
In this post we’ll answer these questions & explain the basics you need to know about forex trading.
What is foreign exchange trading?
Forex stands for ‘foreign exchange‘, which is the global trading market for currencies.
In this market it’s possible to trade in many currency pairs. For example the most 7 common ones are:
Each of the symbols represents a currency of a country. For instance, USD stands for the United States Dollar, EUR is the Euro, GBP the Great British Pound, CAD the Canadian Dollar, AUD the Australian Dollar and NZD the New Zealand Dollar.
These 7 currency pairings that are listed are known as the ‘majors‘, as they are the most commonly traded currencies on the Forex Market.
Besides these 7 major pairings, there are still over a 170 different currencies across the globe that are used in the market for further currency pairings.
This offers a lot of choice for forex exchange trading. However, the EUR/USD remains the most popular pairing worldwide for traders.
What is the foreign exchange rate?
When a currency is compared to another, their value is called the foreign exchange rate.
For those who have travelled abroad to foreign countries, most people will have had the experience of changing up money into the local currency.
The amount that will be received back all depends on the latest foreign exchange rate, and this exchange rate can change rapidly in a short amount of time. It can increase or decrease depending on the latest rate.
The foreign exchange rates can be affected by many factors though. Some worth mentioning include the national unemployment rate, political situations, international agreements and inflation for example.
One political situation that is currently affecting the GBP/USD exchange rate right now is Brexit. British politicians are still struggling to settle on the best deal for the United Kingdom to leave the European Union.
With the ongoing political uncertainty, this has caused the GBP/USD pair to decline in value. It’ll be interesting to see how the Brexit situation plays out, but it clearly shows that any national change can affect the foreign exchange rate.
Foreign exchange market traders
The main participants to this market are banks, financial institutes, companies and small private traders.
This means that everybody, especially private traders, can trade in this market. Importantly it doesn’t require a big amount of money to begin trading.
What you need to start is access to a respected forex trading platform and to have a good trading strategy in place.
What is a foreign exchange trading platform?
A forex trading platform is an online platform where it’s possible to trade forex. All these platforms are owned by various brokers.
There are a lot of them to choose from, the important thing to remember is to find a trustworthy and regulated one.
A regulated broker is officially allowed to operate as a broker. It also means they hold licences from financial regulation authorities such as CySEC or the Financial Conduct Authority. They must follow strict guidelines put in place to protect traders from fraud.
This is why you must choose a regulated on so you can avoid scams that unfortunately happen with unregulated and illegal broker platforms.
All the brokers listed on our site are fully regulated and secure to trade with.
To learn more about this topic please read our related article on our trading platform page.
What is a foreign exchange trading strategy?
A forex trading strategy is a way for a trader to invest in the market. There are many strategies available for every type of trader. However, it’s important that you find the best one for you when you start trading.
Strategies will help you to analyse the market so you can predict the movement of selected currency pairs.
To learn more about this topic further, please read our forex trading strategy page.
Now returning to the main question of ‘what is foreign exchange trading?’ This is when a trader invests in this market and has the opportunity to earn some money by predicting a forex pair’s price movement.
For example, you know have a trading account with a broker and you wish to place a trade order on EUR/USD. You must decide if the exchange rate price of that currency pair will either grow up or go down.
If you believe that the price will go up, you place your trade to ‘buy‘. Or if you think that the price will decrease you need to place your trade to ‘sell‘.
If the belief is correct and the foreign exchange rate moves in the way you predicted. Then you will make a profit.
‘Trading in this market means deciding if the currencies pair price will go up or down and because of that decision, proceeding to buy or to sell it.’