Forex Made Easy – How Forex market works?

Forex is not one of the most frequently used terms by most stock traders. This is because not everyone is interested in trading on forex markets due to its high risk game. This ‘forex made easy’ article would help you understand basics of forex and how it works. In most simple terms, forex is nothing but exchange of foreign currencies. In forex trading, more than one trillion dollars are traded on a daily basis which is much higher than any other market. This market is used by smart traders for hedging and speculation of currencies and to take long term profit taking.

In earlier days, the forex trading was available only for large institutions, banks and financial institutions. But with invention of internet and availability of high speed internet connection, anyone and everyone has an option to do this type of trading. To clear a lot of misconceptions about forex trading, here are a few pointers:

  • Forex trading can be done by anyone
  • You don’t need to be an economist to understand currency market and do forex trading
  • You just have to understand the basics of currency market and learn to read forex signals.

How does forex market work?

Before you start trading in a forex market, you need to understand the basics of the trading environment. Like a stock market environment, a forex market also has a few characteristics. The main players in a forex market are: banks, forex dealers and traders.

Banks – The banks or the “interbank market” is nothing but the network of banks which trade the currencies of different countries.

Forex dealers – These are essentially big institutions which have access to banks for doing currency trading through their brokerage agreements. The dealer receives current pricing on each forex pair from the banks they have relationships with. The price one dealer sees is the same as the price the other dealers see, because they all have access to the interbank market. These dealers then send the prices to the retail traders. The forex dealers make money through the difference in prices (bid price and the ask price) which is also known as “spread”

Retail Traders – These are the traders who are interested in trading foreign currencies. These are people like you and me who cannot trade currencies directly therefore we go to a forex dealer. They use the system of a forex dealer to do currency trading.

Ways to trade in a forex market

Private investors can trade directly or indirectly in foreign exchange through:

  1. the spot market
  2. forwards and futures
  3. options
  4. contracts for difference
  5. spread betting

Currency Pairing

Currencies are a reflection of the performance of an economy of a nation. For forex trading, the currencies are paired. As currencies are traded in pairs and exchanged one for the other when traded, the rate at which they are exchanged is called the exchange rate. These four currencies traded against the US Dollar make up the majority of the market and are called major currencies or the majors. Over 90% of all currencies are traded against the US Dollar. The four next most traded currencies are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc (CHF).

If you like this post then Bookmark it :
  • Print
  • Digg
  • Sphinn
  • del.icio.us
  • Facebook
  • Mixx
  • Google Bookmarks
  • IndianPad
  • Propeller
  • RSS
  • StumbleUpon
  • Twitter
  • Yahoo! Buzz

Related posts:

  1. Forex Signals – What are Forex Signals and How to use Forex Signals?
  2. Forex Trading Strategy – Different forex trading strategies used by forex traders
  3. Forex Hedging – What is Forex Hedging and should you do it?
  4. Forex Signal Service – How to choose the best forex signal service?
  5. Forex Managed Account – Should you get one?

Filed Under Forex | Leave a Comment

Tagged With , , , , , ,

Comments

Leave a Reply