What is forex trading? | Everything You Need To Know As A Beginner

In this article tutorial we will get an answer to the question, what is forex trading? Forex basically stands for foreign exchange or an exchange for one currency for another currency. 

Let us try to understand this, in today’s world we have different countries and every country has its own currency. These currencies have their own value depending on the economy. if a country’s economy is strong, it currency will be strong and if a country’s economy is weak, it’s currency will be weak.

Assuming you want to exchange your country’s currency for another country’s right? By doing so, you will have to give an equivalent amount of the currency you want. When you are exchanging one currency for another currency, it’s called foreign exchange or forex trading. 

Let’s take an example of this, let’s say you live in Canada and you have won a trip to the USA which is fully paid for but, you didn’t know and thought will require emergency funds. Following up on that, you went to the exchange office and asked about the exchange rate of US dollars.

Let’s just assume that one dollar is equal to two Canadian dollars. You exchanged an amount equivalent to $1000 and you fulfilled the trip. Upon returning, you still had that $1000 in your possession because you didn’t have to use it.

You again have to head to the exchange office to that one thousand US dollars to Canadian dollars. This time they gave you a little bit more than you bought the US dollar for. this will make you wonder how you got a bit more compared to the last time.

How is this possible? This is because while you were enjoying in the United States, the US dollar got stronger and that affected the rates. Due to this you had a profit. I hope you get the concept? 

In the same way, there are different countries in the world and each country has its own currency with rates fluctuating every single day. in forex trading, you can buy and sell different currency pairs and earn profits from it.

You just have to predict if the currency you are buying will get stronger at a time and the currency you are selling will get with time. Luckily, you don’t have to go to the exchange office everyday. You don’t even to have an office for it.

These days, you can trade forex from any corner of the world even while traveling. You can directly trade forex with a laptop or a smartphone with the help of internet connection.

Now let’s look at some facts about forex trading: 

There are 8 major currencies in the forex market, the United States dollars, Japanese Yen, Swiss francs, New Zealand dollars, Canadian dollars Australian dollars, British pounds and Euros. 

The forex market has a daily trading volume of around 6 trillion US dollars. You can imagine how big big the market is. Now you might be asking the question, how does the forex market work? Well let’s delve into that

How does the forex market work? 

So why does the value of the currency change from time to time? Well there are a few factors that influence the value of a given currency and due to this, the value of a different currency changes from time to time.

Out of all the factors, there are thee major factors that causes the value of a currency to change from time to time. These are traders, the banks and the fundamental news. How do these factors affect the market? Let’s take a look at them one after the other. 

The traders

There are a few types of people who fall under this category. These people are, day traders, swing traders and position traders. Traders basically reacts to the supply and demands because they feel that these levels are very important 

What drives the forex market is the volume. The party with more volume drives the market. Let’s say at some point, buyers are more in quantity than the sellers . With this, the buyers will push the market push the market up. The party which has more volume has the momentum of the market with them. 

There are different levels of supply and demand that the traders react to. This causes the momentum change from time to time throughout the forex market. Hence causing the price of the market to constantly change.

Banks

How do the banks affect the forex market? The banks are the positional traders, they basically change the main trend of the currency pairs. They enter the market in very specific areas and drive the market in that direction.

Fundamental News

Every country has their economical data and this data tells us whether the countries economy is getting stronger or weaker. If the economy of the country gets weaker, then the currency gets weak. Same applies to when the economy of the is stronger, the currency becomes stronger. 

So every country has an economical news schedule throughout the month. When the news is released, it causes the short term sudden movement of the forex market and cause the value of the currency to change. 

This is how the entire forex market works, and to make money I. Forex, you just have to predict if the price of a certain currency is going to increase or it is going to decrease. 

Currency Pairs And Quotation

Up until now, we have talked about what forex market is and how it works. And I have mentioned that you’ll have to buy and sell currencies to make profit. Normally when we exchange our currency for another currency. 

We buy one currency and sell another currency, like if you want to exchange euros for US dollars, what you are basically doing is that you are selling euros and buying US dollars. This means that in forex trading, two currencies are paired with each other.

That leaves us the fact that currencies are always traded in pairs. Some examples are, EUR/USD, GBP/JPY and more. There are different currencies in the world but out of all the currencies, there are only eight major currencies and they are: US dollars, Euros, Japanese Yen, British Pound, Australian Dollar, Canadian Dollar, New Zealand Dollar and the Swiss Franc.

These major currencies and several other currencies together form pairs in the fires trading market. And they all form in three categories, the major, minor and exotic currency pairs.

Out of the eight currencies mentioned above, the US dollar is called the reserve currency of the world. The reason being that it is the most widely used currency and almost every financial system accepts it.

When the US dollar is linked with or paired with any of the eight major currencies, it is called a major currency pair. Some examples are, EUR/USD, GBP/USD, USD/JPY. The currency pairs in that does not have US dollar in it is termed as a minor currency pair. 

These pair do not have USD included but have the other major currencies involved in it. Some examples are, GBP/JPY, EUR/JPY and more. Finally the currency pairs which includes a major currency and currency of a developing country like South Africa or India are called exotic currency pairs. 

Moving forward, when you see a forex chart, it consist of a market session with two currencies as the currencies are always traded in pairs. When you buy one currency, you automatically sell the other currency.

If you open a buy position on EUR/USD, it simply means that you are buying euros and you are selling US dollars. The first currency of the pair is called the base currency and the is called the quote currency.

Like the EUR/USD example, euro is your base currency and US dollars is the quote currency. Let’s take another example so you can gain some understanding. USD/JPY, in this case US dollar is your first currency which means it’s your base currency and Japanese Yen is your quote currency. 

Every currency pair has its quoted value and this is given right at the front of the current pair symbol. For example, the current quoted value of EUR/USD is 1.17754. This value tells us the amount of quote currency required to buy the base currency.

The quoted value of EUR/USD as given above tells us that it will require around 1.17775 US dollars to equal the value of the euro. This is also the exchange rate of EUR/USD. 

Another example. Let’s say the current quote of USD/JPY is 105.85. What this means it that it will require 105.85 Japanese yen to equal 1 US dollar. 

I hope you understood everything clearly. If not then feel free to ask your questions in the comments section. I will see you in the next class which I have linked below

Next class: Forex Trading Essentials | What You Need To Get Started

And if you missed the introduction article that has all the details on what this course is all about, you can read that here: Introduction To Forex Trading | Full Course For Complete Beginners