The forex or foreign exchange market is where currencies are exchanged and traded. The forex market is the most significant asset trading market, and the trades affect the prices of everything, whether it’s importing an automobile part from Germany to paying the bill for the shrimp fried rice while holidaying in Bali.
Foreign exchange trading is similar to the currency exchange you do when travelling abroad. Here, a trader buys one type of currency and sells another on various platforms, such as the Meta Trader 4 trading platform. This causes the exchange rates to fluctuate constantly, depending on the balance between supply and demand.
How Are Currencies Traded?
Every globally recognised currency has a three-lettered code associated with it. Though there are more than 170 currencies across the world, the U.S Dollar (USD) is the most traded currency in the forex market. Second to this is the Euro.
All forex trades are expressed in pairs. Here are five pairs that are some of the most commonly traded pairs in the forex market:
How to Interpret Information From the Currency Pairs
Every currency pair on any platform, such as the Meta Trader 4 trading platform, has two currencies: the base currency and the quote currency. For instance, in EUR/USD, EUR is the base currency, and USD is the quoted currency.
The exchange rate for this pair would represent the amount of the quote currency required to buy 1 unit of the base currency. This way, the base currency is maintained at 1 unit, while the quote currency fluctuates depending on the demand and supply.
Now let’s assume that the EUR/USD exchange rate was 1.4. This would indicate that EUR 1 would buy you USD 1.40.
If the exchange rate rises, the value of the base currency will rise compared to the quoted currency. Conversely, if the exchange rate were to fall, the base currency’s value would dip compared to the quote currency.
Different Ways to Trade in Forex Markets
Most forex trades speculate about future price movements, similar to the stock market. And identical to stock traders, forex traders are interested in buying currencies whose purchasing power they believe will rise. There are three ways to trade currencies, each with different goals.
- Spot markets: This is the primary form of forex markets where currencies are swapped, and the rates are determined in real-time, depending on the supply and demand.
- Forward markets: In these markets, instead of running trades now, a trader can form a binding contract with other traders and set a rate for a predetermined amount of currency for a future date.
- Future markets: This is similar to the forward market, where traders can choose standard contracts to buy or sell a certain fixed amount of a currency pair at a future date at a specific exchange rate. These are done on exchange venues like the Meta Trader 4 trading platform.
How Does the Market Move?
Like any other market, the forex pairs’ exchange rates are determined by the supply and demand caused by the buyers and sellers. Nevertheless, various macro and micro forces and players indirectly move the traders to increase or decrease the demands and supplies. The micro details are countless and cannot be listed. Macro forces include central bank policies, interest rates, and economic, political, and environmental conditions.
This article has explained the basic workings of the forex market to help beginners. Nevertheless, understanding forex trading in depth is a fairly complicated task and involves a steep learning curve for anyone to play ball with it. Having said this, learning more and gradually getting exposed to the markets on venues such as the Meta Trader 4 trading platform could go a long way. The benefits are rewarding with almost no bounds.