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Venturing into Forex for the first time?
Explore the basic concepts of buying and selling.

What is Forex?

... and how does FX Trading work?

Forex, also known as foreign exchange trading or FX trading is defined as the process of changing one currency into another, for various reasons like commerce, tourism, and trading. According to the Bank of International Settlements, the daily Forex trading volume in 2019 was more than $5.1 trillion, and this number is steadily growing with every passing day.

In this article, we will take a closer look to understand what is Forex and how does FX trading work?

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What is Forex?

The foreign exchange or FX is a global marketplace where national currencies are exchanged against one another. It includes a network of buyers and sellers who transfer currencies among each other at an already agreed price. It is the main way for companies, individuals, and central banks to actively convert one currency into another

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Even though a lot of currency conversion happens because of practical reasons, the majority of forex trading is done for profit purposes. The vast amount of currency that is converted everyday can make the sheer price fluctuations of some currencies heavily volatile.

And it is this volatility of the currency market that attracts so many traders to it: greater chance of profits and higher risks. Although, these risks eventually simmer down when you know exactly how and where to trade.

How FX Trading works?

Forex trading involves buying one currency and then simultaneously selling the other one. By speculating and analyzing the direction the currencies are most likely to take in the coming future, traders try to make a profit by buying currencies whose value is expected to increase in the future and selling currencies that might lead to a loss.

Forex trading does not take place on pre-decided exchanges. Instead, you trade currency in an over-the-counter (OTC) market, directly between two parties.

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The forex market is in fact run by a wide global network of banks that are spread across major trading centres in different time zones including: Tokyo, Sydney, New York, Frankfurt, Singapore, Paris, and London. Since there is no centralized location for forex trading, the market is open for five and a half days every week, 24 hours a day and the currencies can be traded in all the major financial centers of the world in almost every time zone.

That means, when the trading day ends in New York, it kickstarts back again in Hong Kong and Tokyo. Therefore, the forex market can be incredibly active at any time of the day with the price quotes constantly changing.

Global Forex Market Hours

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Once you have decided on the currency you want to trade, you also need to decide on how you want to trade currency. There are three different types of Forex markets:

  • Spot forex market: This is the physical exchange of currency pairs that happens ‘on the spot’ or within a short span of time.
  • Forward forex market: In this, a customizable and private agreement is set up with details about the currency to be traded, the set price, and the range of future dates when the exchange is expected to take place
  • Future forex market: In this, a standardized agreement is set up with the same details as that of forward forex. The main difference is that the future forex is traded through central marketing with a legally binding contract, whereas the forward forex is traded through over the counter contracts (just private agreements between theo parties trading)

Most traders do not plan on taking the delivery of the currency. Instead, they focus on making exchange rate predictions between different currency pairs to take advantage of the price movements

Want to know more about how to trade Forex? Check out our detailed guide.

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