Forex Trading is basically the act of buying and selling currencies. In a typical foreign exchange transaction, an entity purchases one currency by paying with another currency.
Forex trading involves the trading of currencies against one another in pairs. Each currency pair thus constitutes an individual trading product and is traditionally noted – EURUSD or EUR/USD just as an example. The first currency (EUR) is the base currency that is quoted relative to the second currency (USD) which is called the counter currency. For example, the quotation EURUSD (EUR/USD) 1.5656 means that 1 Euro = 1.656 US Dollars.
WHO TRADES ON FOREX?
Before the advent of the internet and advancements in technology, the Forex market was only reserved for big players such as big banks, hedge funds, multinational corporations, governments, and central banks.
Things have changed from that period in time with the aid of technological advancements in the Information Technology sector. Access to the market has now been made easier for individual traders and investors. Forex traders can now trade on the Forex market from anywhere around the world as long as they have a computer and an internet connection.
Forex trading is performed by individual traders, institutional investors, corporations, central banks and banks. The reasons these entities trade in Forex range from balancing the markets, facilitating international trade and tourism and making profits.
THE FOREX MARKET
The Forex market is the largest and most liquid financial market in the world with an average daily turnover of $5.3 trillion. Approximately half of this turnover comes from foreign exchange swaps. The rest include spot transactions, outright forwards, currency swaps, foreign exchange options and other products.
Being such a huge market, this means that no single market participant can significantly influence the currencies’ exchange rates. With this in mind, it is important to note that the Forex market hence provides a fair market pricing to all participants.
The market assists international trade and investments by enabling currency conversion. For example, it allows Kenya to import goods from China and pay in the Chinese Yuan instead of the Kenyan Shilling. It also supports direct speculation and evaluation relative to the value of currencies and the carry trade speculation, based on the differential interest rate between two currencies.
The Forex Market is also quite unique. This is as a result of the following characteristics:
- It has a huge trading volume. This also means it has a high level of liquidity, which translates to more opportunities to make money.
- The concept of leverage while placing investments. It is used to significantly increase returns earned from the investments/trades
- This market operates 24 hours a day, 5 days a week. This means it operates at all times and on all days except on weekends.
WHAT IS TRADED ON FOREX?
There are eight major currencies in the world: the US dollar (USD), euro (EUR), the British pound (GBP), the Swiss franc (CHF), the Canadian dollar (CAD), the Australian dollar (AUD), the New Zealand dollar (NZD), and the Japanese yen (JPY).
There are also other currencies that are not as heavily traded as the major currencies which are known as exotic currencies. Some examples include: the Turkish Lira, the Swedish Krona, the Norwegian Krone, the Danish Krone, the South African Rand, the Hong Kong Dollar and the Singapore Dollar. Trading these currencies should be left to the more experienced traders, as they can move a lot in very short periods of time and usually involve higher transaction costs than major currencies.
All currency pairs that involve the US Dollar and any of the other major currencies are called “major pairs”. This remains so even if the US Dollar appears as the base or counter currency. In the case where the pairs do not include the US Dollar, but they include two of the remaining seven major currencies, the pairs are called “cross pairs”.
HOW TRADERS MAKE A PROFIT
Forex traders try to buy a currency cheap and sell it later at a higher price. However, there’s also a way to profit when prices fall through a technique called “short selling”.
For example, if the Euro vs. US Dollar is currently trading at 1.5050 and a trader believes that the exchange rate will rise in the future, they would be compelled to buy the pair at the current rate. If after a few hours or days the exchange rate trades at 1.5150, the trader would have made a profit.
If you feel like you need to start trading, or you would like to take your trading to the next level, FourthStreet Consultants offers a comprehensive Online Forex Course which is an all-inclusive program for those committed to becoming successful traders. It provides step-by-step trading basics that will equip you with the knowledge and information you need to understand and trade in the Forex market. The Forex Online Course comes with free one-on-one consultations to the signed students, which is done either at the company offices at Karen, Nairobi, or at the student’s convenience with prior arrangement.