Investing in Forex trading: how does it work?

by mansi

Every day, 6.6 trillion dollars are traded in the Forex market worldwide. It’s the currency exchange market, Forex being the contraction of “Foreign Exchange”. The concept is simple: investors sell and buy currencies here. Trading in this market can yield substantial profits, but the risk of loss is also high. So how does Forex trading work? Is it a good idea to invest in this market? Find out now.

What is Forex?

The Forex market is, therefore, the one where currencies are exchanged. If you’ve ever travelled to a country with a different currency than yours, you’ve probably encountered it when changing money. You then bought a foreign currency by reselling your own currency at a fluctuating exchange rate.

The exchange rate of different currencies is constantly changing because it is the only market in the world that is open 24 hours a day during weekdays.

How Forex Trading Works

Forex trading works in “currency pairs”. So, to buy one currency, you always have to sell another. For example, for the Euro and Dollar pair, called EURUSD, you must sell dollars to buy euros and vice versa.

The first currency in the pair (here, EUR) is called the “base currency” while the second (here, USD) is the “counter currency”. The EURUSD value, therefore, expresses the amount in dollars that you can obtain in euros.

Why does Forex work in pairs? The purchase of a currency necessarily implies the sale of another currency and vice versa. Please note that the currency pairs are always expressed in the same order. Thus, we encounter EURUSD but not USDEUR.

To earn money, you then resell the dollars you have bought to obtain euros again, once the dollar rate has become more advantageous for you.

Forex traders calculate gains in “pips”. This is the last decimal place of a currency quote, usually the fourth for most currencies. For example, if the price of a currency goes from 1.1131 to 1.1134, its price has gone up by 3 pips.

The most popular currencies in Forex trading

The most-traded currencies on the Forex market are the US dollar (88% of trade), the euro, the Japanese yen, the Swiss franc, and the pound sterling,. These currency pairs are the most represented: EURUSD, GBPUSD, USDJPY and USDCHF.

Three other currencies are also traded quite frequently: the New Zealand dollar, the Australian dollar and the Canadian dollar. They are mainly present within these three pairs: NZDUSD, USDCAD, and AUDUSD.

Finally, other currency pairs traded in Forex are called “exotic currency pairs”. They represent less than 10% of foreign exchange transactions.

These are just the basics every newbie trader should know about Forex before opening a trading account. There’s a lot more to learn, especially regarding trading strategies. Therefore, make sure to choose a brokerage service that has to offer free educational materials. Also, before choosing the broker, read brokerage reviews such as trendsmacro review, since these are great sources of information about trading conditions of specific brokers that might interest you. 

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