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What Forex Trading Is And How It Works

What Forex Trading Is And How It Works

What Is Forex Trading?

The foreign exchange market, or forex for short, is a market where you can exchange one currency for another. With a daily trading volume of $6.6 trillion, the forex market is huge! It dwarfs the New York Stock Exchange (NYSE), which trades just $22.4 billion a day by comparison.

The sheer size of the forex market attracts a wide variety of participants including central banks, investment managers, hedge funds, corporations, brokers and retail investors – with 90% of these market participants being currency speculators!

So what exactly is happening in the forex market to make it so attractive to investors from around the world? Imagine you want to exchange one currency for another. You sell one currency and buy another.

Forex trading is all about the exchange rate between these two currencies. The exchange rate is subject to constant fluctuations, and it is precisely these fluctuations that allow market speculators to make money from trading or lose their investments. These fluctuations are determined by the supply and demand of each currency!

It is also important to mention here that while you are trading, millions of other traders are also entering the forex market.

So when you ‘sell’ a currency, there is a buyer for that currency somewhere else. The more people trade, the more money there is in the market, which we call ‘liquidity’. As we have already mentioned, the forex market is huge with millions of traders around the world. Therefore, the liquidity in the forex market is really high!

 

How it Works?

There are approximately 13.9 million traders worldwide who buy and sell currencies at the same time. As we have already mentioned, this means that the liquidity of the forex market is very high.

This high level of liquidity means traders can enter and exit a trade as there is usually a buyer for the currency you are selling or a seller for the currency you are buying!

High levels of liquidity also have other implications. When liquidity is high, there are many market participants, so trading costs, e.g. B. the spreads, may be lower. It also means that the market is much less prone to market manipulation! When someone opens a large trade in a low-liquidity market, it has a huge impact on the price. This doesn’t happen in forex trading because there is such a large volume traded!

The foreign exchange market, which includes all world currencies, is open 24 hours a day, Monday to Friday. Trading in these currencies is known as over-the-counter, or OTC for short. This means there is no physical exchange like there is with stocks. It is a global network of financial institutions and banks that oversee the market, rather than a central exchange like the New York Stock Exchange.

As an individual, you are likely to be classified as a “retail investor”. However, most forex trading is done by “institutional traders” such as banks, funds, and large corporations. They will not necessarily actually buy or sell the currencies but rather speculate on the price development or hedge against upcoming exchange rate changes.