Forex Trading: What exactly is Forex?

Forex Trading: What exactly is Forex?
Forex Trading: What exactly is Forex? Image source: Pixabay

Forex trading is a term that’s used to describe individuals that are involved in the exchange of foreign currencies, usually for earning or gaining financial benefits. It can be those who wish to make money from the currency’s movements; or a hedger who wants to protect their investments in case of adverse moves against their currencies.

The term ‘forex trader’ could refer to the individual trader who is on a retail platform or bank trader who is using their institutional platform or hedgers that could be either taking care of their own risk or outsourcing that function to a money or bank manager to manage the risk for them.

Forex Trading: The FX Market

The foreign exchange market also known as forex (FX) for short, is a decentralized market site that allows the selling and buying of different currencies. This takes place over the counter (OTC) instead of on central exchange.

You may not realize it, but you’ve probably participated in the forex market by ordering imported products such as clothing or shoes or, perhaps, buying foreign currency when traveling. People who trade may be attracted to forex due to a variety of reasons, such as:

  • The FX market is huge.
  • A wide variety of currencies available for trading
  • Different levels of volatility
  • Low transaction cost
  • Trading is available throughout the week

This article is for traders at all levels. No matter if you’re new to trading forex or looking to build on your previous knowledge This article will offer a solid foundation for the foreign exchange market.

Forex Trading Two sides to Every Market

A unique feature of the Forex market is the method the prices are portrayed. Since currencies form the basis of the financial system, the only method to determine the value of an exchange rate is through the use of other currencies. This creates a relative value metric, which may seem confusing at first but becomes more common when one is more accustomed to this two-sided convention.

Forex trading in pairs offers traders a little more flexibility. Investors or traders can express their opinions on any currency they wish to use.

Let’s take the Euro as an example. An investor might be optimistic about the European economy, and would want to buy the currency. Let’s say that the investor is bullish about the US economy but bearish on the UK economy. In this case the investor isn’t required to purchase the Euro against the US Dollar (which would be an extended EUR/USD trade) or instead buy the Euro against the British Pound (going long EUR/GBP).

This gives the trader or investor the flexibility to make decisions. Instead of ‘going short’ on US Dollars to buy Euros, they are able to purchase Euros while shorting the British Pound.

Forex Trading: Base v/s Counter Currencies

A Forex quote has one important difference: the convention. The primary currency of the quote, also referred to as the “base” currency of the pair is the currency being quoted. The second currency of the couple is called the ‘counter currency’. It is the standard of a quote or currency that is used to determine the value of the first currency.

The Forex trading course Unisa is a great option.