What is Forex Trading? (Part 1)

Trade Forex with a Global Regulated Forex Broker!

Trading forex involves buying one currency and selling another simultaneously. Through careful analysis, traders predict the potential direction of currency prices and attempt to capture gains based on price fluctuations. There is no centralised exchange for forex trading. Rather, it takes place electronically or online, between networks of global computers. The market is open 24 hours a day, 5 days a week.

Keep in mind that timings in some countries, like Australia, the US and UK, shift to/from daylight savings time in October/November and March/April. So, plan your trades accordingly. Market liquidity for currency pairs depends on the forex trading sessions. For instance, the EUR/USD pair shows a lot of movement and liquidity during the confluence of the London and New York sessions. The AUD/USD pair shows maximum movement in the Tokyo and London sessions. Once you know when to trade, the next step is to learn the jargon. So, here are some terms and concepts you will come across in the market.

A Brief History of Forex

The exchange of currencies dates back to 600BC when the first official currency was created. Fast forward to today and the forex market has become the largest financial market in the world. The timeline below highlights key moments in the journey of forex.

600 BC	Kingdom of Lydia introduces coins made of gold and silver.
618 AD	Tang dynasty in China created the paper note.
1661 AD	The first banknote ever printed in Europe is produced in Sweden.
17th century	Amsterdam becomes home to the first forex market ever created.
1819 AD	England adopts the gold standard with the government guaranteeing to redeem any amount of paper money for its value in gold. The United States followed suit in 1834 before other major countries (France, Germany and others) in 1870.
1946 AD	Following multiple World Wars, the gold standard system breaks down. It is replaced by the Bretton Woods System. The US Dollar is established as the world’s reserve currency.
1973 AD	Official switch to the free floating system.
1996 AD	Birth of online brokers.
2005 AD	MetaTrader 4, a revolutionary trading platform is released. It is specifically designed for forex traders and features real-time pricing.
Today	Daily forex turnover figures exceed more than $5 trillion per day.

How Do Forex Markets Work?

Forex is the most popular over-the-counter (OTC) market. In forex, currencies are bought and sold through a network of banks. As there is no exchange, forex trading is decentralised and trading can take place 24 hours per day. There are 4 main trading sessions, namely Sydney, London, New York and Tokyo.

The most popular forex market type is the spot forex market. In forex, spot trades involve the exchange of currency pairs electronically using an online trading platform. Other market types include the forward forex market and futures forex market.

What is a Base and Quote Currency?

Currencies are denoted in 3lettered ISO codes. Examples of how major currencies are denoted are USD (US dollar), AUD (Australian dollar), EUR (Euro), JPY (yen) and GPB (British Pound).

In foreign currency trading, currencies are quoted in pairs. When you see a currency pair, the first currency is called the base currency and the second currency is the quote currency or counter currency. For instance, say the EUR/AUD is trading at 1.6163. This means to buy 1 unit of Euro, you will need $1.6163 Australian dollars.

What Moves the Forex Market?

There are a number of factors that have an impact on the forex market. They can split into two categories; market participants and macroeconomic factors.

Market Participants

• Super Banks: As it is decentralised, it is the world’s largest banks that determine the exchange rate. Global banks such as Barclays, HSBC, Citi, JPMorgan and Deutsche Bank are among the biggest traders of forex.
• International Companies: Large global corporations are involved in the foreign exchange market for the purpose of doing business. If an Australian-based company is selling products in the United States they will have to trade USD to AUD in order to return their income back home.
• Retail Traders: Refers to individuals who trade their own money in order to make a profit. Easier access to the forex market through online brokers and advanced trading platforms has resulted in retail traders accounting for a growing proportion of the forex market.

Economic & Macroeconomic Factors

• Central Banks: Macroeconomic statistics such as inflation have a significant impact on forex markets. Governments and central banks such as the Federal Reserve meet on a regular basis to evaluate the status of their respective economies, set interest rates and monetary policy – all of which have a direct impact on forex markets.
• Capital Markets: The prices of stock, bond and commodity futures also have an influence on foreign exchange markets.
• International Trade: Figures relating to the trade numbers of a country have an impact on the value of currency. Trade deficits and surpluses will be reflected by price movements in the forex market.
• Politics: This is particularly the case around key political events such as elections and results in high levels of volatility in the forex market. This is evident by historical events such as Brexit in the United Kingdom and numerous presidential election campaigns in the United States.

How does Forex Trading work?

Forex trading involves simultaneously buying and selling two currencies. For example, if you are buying the EUR/JPY, it means you’re buying EUR by selling JPY and if you’re selling the pair, you’re buying JPY by selling EUR.

Advancements in technology now allow investors to access the foreign exchange market via online brokers. This is done using forex trading platforms such as MetaTrader 4, MetaTrader 5 and Iress. Read more on How Do I Trade Forex?

The rise in online trading has paved the way for using CFD trading. These are leveraged products which allow traders to open a position with an initial investments that is only a fraction of the value of the full trade.

Read What is Forex Trading? (Part 2)