Foreign exchange trading, also known as ‘FX’ trading or ‘Forex’, entails selling and buying currencies.
On the most basic level, citizens who exchange GBPs for foreign currency at, a Post Office, bank, or travel agency before going on vacation abroad are engaging in forex payouts. Forex traders perform something alike but on a larger scale.
Because of the advancement of technology, it is also a market that provides incentives for individual investors and traders who have the necessary skills. Here’s a closer look at forex and the key points to remember.
What exactly is forex trading?
Forex trading is based on speculation buying and selling of currencies for profit. It can also be used to ‘hedge’ existing money bets against the backdrop of fluctuating exchange rates. (Hedging is the process of protecting a position from the possibility of a financial loss.)
All hours are welcome
Individual stock exchanges, such as those in London, Frankfurt, and Hong Kong, operate on their schedules and are thus stop-start in nature.
In contrast, forex is a 24 hour market with four major trading hubs operating in different time zones: London, New York, Tokyo, and Sydney. When trading in one location comes to a halt, the forex market will continue to operate in another.
Why do people trade forex?
Forex trading is done for a variety of reasons, including hedging against global currency and interest rate risk. This is particularly relevant at the moment, as global economies grapple with inflationary concerns and interest rate levels are under scrutiny.
How are currencies traded?
Each currency in the world has a three-letter code. These are equal to the signifiers used on stock markets to identify a specific company, such as DGE on the London market for Diageo.
The spot market
The spot market can be understood as the primary forex market, a place where currency pairs can be exchanged and the exchange rates are calculated in a real-time market-driven.
the futures market This is the process by which forex traders can start binding contracts with one another, locking in a specific exchange rate for an amount of currency agreed-upon at a future date.
The futures market Unlike the forex and spot markets, this is where traders enter into a contract agreement on a dedicated exchange to buy or sell a pre-agreed amount of currency at a fixed rate on a future date.