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What is Forex Trading and How it Works

What is Forex Trading and How it Works?

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The name forex means foreign exchange. The foreign exchange market (FX/Forex) is the market for the exchange of foreign currencies. It is the largest market in the world, and it affects the whole world in a significant way.

All the forex trading happens over the counter (OTC), i.e, everybody does online Forex trading, and no physical exchange of money takes place. One can do trading in the Forex market if they have an internet connection, currency trading account, and money.

What is Forex Trading and How it Works?

There is no need for a DEMAT account, as there is no delivery of currency. People deal directly in the Forex; hence, no brokerage charges are there. You can start trading if you have these items ready with you.

Forex trading is similar to the exchange of currency during your travel to a foreign country. A trader buys one currency and sells another, and the exchange rate fluctuates frequently based on the supply and demand.

How can one trade in Forex?

Most of the trading that happens in Forex is not for the purpose of exchanging currencies. The traders buy and sell the currencies based on the speculation about future price movements, much like one would with stock trading. They aim to gain from the fluctuations in the market.

There are three ways one can do online Forex trading, and each trader chooses the method as per these goals. You can also select one of these methods to trade currency in the Forex market.

The Spot Market

It is called the primary Forex market. This is where the currency pairs are exchanged, and the exchanged rates are fixed in real-time. All these happen based on supply and demand.

The Forward Market

A trader can enter into a private or bound contract with another trader instead of executing trades like in the spot market. He can go for the binding contract and lock on the exchange rate for an agreed-upon amount of currency on a future date.

The Future Market

A trader can opt for a standardized contract to sell or buy a fixed/predetermined sum of a currency. The currency is bought or sold at a specific exchange rate at a date in the future. These are done in exchange and not privately like the forward market.

What are forces in the Forex market?

Similar to the other markets, currency prices are set by the supply and demand of buyers and sellers. But, some macro factors play a vital role in the market. The demand for a particular currency can also influence the interest rates. The other significant factors are the pace of economic growth, bank policy, the political environment of different countries, etc.

The Forex market is open twenty-four hours a day, five days a week, which allows the traders to react according to the news/ fluctuations in the market. The fluctuations in the Forex market are sudden and impact those who don’t take steps according to that change.

Does Forex trading affect ordinary people?

The fluctuations of currencies do affect ordinary people. If one is exporting/importing goods, the currency fluctuation will affect his business. The purchasing power of each individual will be affected if the value of the currency goes down suddenly. The cost of traveling (flight tickets/accommodation) in a foreign country changes as well. In a way, the Forex affects all the people who use currency, that is, all of us.