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What is Forex Trading?
Forex trading, the acronym for foreign exchange trading, is the purchasing and selling of currencies in the foreign exchange market. It can also be said to be the simultaneous buying and selling of currency pairs, done to make a profit. The forex market is a global, decentralized market where the world’s currencies change hands, exchange rates change by the second which makes the market constantly be in flux.
When you trade currencies, you are predicting that one currency will appreciate or depreciate relative to another one. Forex trading, thus, is a relative value trade, which implies that you look for one currency to appreciate in value and for another currency to depreciate relative to the first.
Benefits of Forex Trading
- With an average trading volume of $6.6 trillion daily, the forex market is a global marketplace with plenty of scope of profitability, as traders in all corners of the world are buying and selling currency pairs at all hours.
- Forex trading is not subject to the opening hours of any centralized exchange system, the market is open 24 hours a day. Forex trading takes place over-the-counter (OTC), meaning transactions are made directly between trading parties, facilitated by a forex broker.
- A forex trader can benefit from leverage, which allows a trader to trade much more than his or her account balance can originally accommodate
- It’s a marketplace with very high liquidity, liquidity refers to the ease with which currencies can be bought or sold with limited effect on their value
- Forex trading offers the opportunity to either buy or sell currencies depending on the state of the market. In trading terms, it is known as going long (buy) or short (sell).
Evolution of Forex Trading
The origin of forex trading can be dated back to the era of the barter system where people exchange goods and services depending on the value they attach to these goods and services, followed by commodity trading, which was thought of as a better measure of value, then came the coinage, made of gold, silver, and other material, however that soon became obsolete and eventually gave rise to paper currency in form of a promissory note given in place of gold, silver and other materials held in the bank, and that created a gold standard. After the second world war, IMF (international monetary fund) was created to solely dictate monetary policy and pegged all the currencies around the world to the dollar (USD) and the dollar (USD) was in turn pegged to gold at $35 per ounce.
In 1973 the dollar was taken off the gold standard by the then President of America Richard Nixon, which canceled out the link between gold and dollar and gave rise to plenty of currencies to be printed. In the modern-day system, after the unpegging of the dollar, IMF created an international system of exchange though this system was only available to banks as a very huge amount of currencies where been exchanged.
In the 1990s, with the advent of technology and the internet, there was advancement as a result in 1994 countries floated there in the market. In 1998 a currency trading system was introduced in the USA and the market opened up for everyone to trade currencies.
Forex Market Players
- The super Banks
- Large commercial companies
- Government and Central Banks
Factors that impact Forex Trading
A lot of factors influence the forex market, nevertheless, the following are the four major ones
- Macroeconomic data – The health of an economy always has a great impact on its currency. More often than not, the better the economic outlook for an economy, the stronger the currency, and vice versa
- Central banks – Central banks dictate monetary policy, which implies that they determine the interest rate. A Higher interest rate strengthens the currency, while a lower interest rate weakens the currency of a particular country.
- Geopolitical events – Events like war, trade conflicts, political election/stability all have an impact on the value of a country’s currency
- Technical analysis – is a trading discipline employed to evaluate investments and identify trading opportunities in price trends and patterns seen on charts. When currency prices break certain levels known as support and resistance in forex, it could make the market move more aggressively.
Most Traded Currencies in Forex
- The main currency pairs that make up the majors would be combinations of:
- United States Dollar (USD)
- Euro (EUR)
- Great Britain Pound (GBP)
- Japanese Yen (JPY)
- Swiss Franc (CHF)
- New Zealand Dollar (NZD)
- Canadian Dollar (CAD)
- Australian Dollar (AUD)