If you’re interested in knowing how does forex trading work, then this is the article for you. This article will explain all that you need to know about how Forex Trading works.
First of all, let us understand what the Forex market is and how it works.
The term “Forex” stands for foreign exchange, which means the buying or selling of transactions involving two different currencies. You can make money trading through Forex trading or by using your currency to buy another currency (exchanging one currency for another).
Trade and sell foreign currencies through Forex trading and earn money.
Three fundamental parts
The forex market has three major parts: the bid, the ask, and the spread.
The bid price is what traders will pay per unit you want to buy in that period.
The “ask” is how much you will receive if you sell a particular amount of currency.
Finally, the spread is also known as “the difference”. The spread represents the cost of executing a trade, i.e., we cannot execute not all trades at “mid-market” where there would be no difference between a trader’s buying price and selling prices.
Each trade has a cost associated with it that needs to be paid by the trader.
How trading is done
Forex trading is bought and sold in pairs; every currency has a corresponding pair, such as USD/JPY or EUR/USD.
1 Unit of currency A will always be equivalent to 1 unit of currency B. For example, if you buy 100 units of EUR, then it means that you have also bought 100 units of USD. Since they pair both currencies, there is no difference between buying one currency and buying its counterpart.
Even though the forex market operates 24 hours a day, five days a week, it does not mean you can trade all the time. It would help if you only took trades when certain conditions apply:
There should be a clear trend in the market. You don’t want to buy or sell in a choppy market.
There should be good volatility in the market. It would be best if you had sufficient movement in the currency’s price for it to move further after your entry or exit.
You should have proper money management (risk and reward).
Once these conditions are met, put your trade on, don’t forget that you can always take off your trade if the conditions change. Always expect reversals when entering a trend.
It is easy to recognise trends but hard to predict reversals; however, they happen more often than not, so be prepared for them.
Forex prices and international currency
Forex prices are set by the market, not the bank or dealer where you plan to take your trade – this is why it’s called Foreign Exchange!
The way forex works are that every international currency will have an associated exchange rate which determines how much one unit of currency is worth in relation to another (e.g. 1 GBP = 1.34 USD).
They will update these rates until about 5 pm GMT each day, after which they may only change depending on world events and how ‘risky’ traders think the world economy is. You can find out more about Forex and how it’s used here.
What makes up a currency?
Currencies are made up of two parts: A base and a quote. The base is the name of that currency and its value against other currencies (e.g. USD).
The quote is represented by an acronym, e.g. ‘USD’, which means you need to know how many units of that base you have to make trades (e.g. 1 USD = 1.4 GBP).
The bid/ask is simply a split between what bid is being asked for your quote currency and Ask is asking for your base currency – so if one unit of USD costs 1.4 GBP, then .734 units of GBP would cost one unit of USD.
The spread between these two prices is maintained by brokers who constantly try to match buyers with sellers… not unlike what you’d see at any market!
Where to start?
If you’re eager to start a career in trading, begin your journey by opening a forex demo account on a trusted brokerage platform, like Saxo Singapore. They offer loads of educational materials, and you can practice without risking your actual investment cash flow.