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How Does Foreign Exchange Trading Work

The word Forex is a shortened version of foreign exchange. It is also referred to as the foreign currency or FX market. This market is known as the largest form of exchange in the world with the market trade trading in at approximately  $4 trillion each day. Individual investors, as well as major institutions regularly  invest in it.

laptop forex trading

Price

The value of a currency is determined by how much of another country’s currency can be purchased. This is known as a price quote. There are two important parts to a price quote, an ask and a bid. When purchasing a currency, the asking price is utilized, while the bid price is used when selling on Forex. The spread, on the other hand, is the difference between the asking price and the bid price.

Forex Quotes

Forex market participants regularly communicate the asking as well as bid prices between them. This communication occurs instantaneously and never stops unless the market is closed. A brokerage firm will provide quotes of currency values for traders that have an account with them. The price quotes obtained by a brokerage firm is received from its liquidity providers.

More liquidity will result in a tighter spread. This benefits everyone involved with this type of trading. Forex trading occurs continuously and is usually smooth. Liquidity is often not a problem as there are times when price gaps can occur. Price shifts have happened over a short period of time and is often caused by major news releases and more.

Buy Order

With the click of a mouse, trading can take place on any chosen Forex platform. Should a buy order be placed on a USD/EUR currency pair, a specified amount of funds are then taken from a trader’s account. This will be used to purchase the base currency. In this case, it will be US dollars.

The quoted value for each of the currencies is sold at the quoted amount. Doing this is known as placing a buy order. This can be communicated directly to a Forex interbank market or with a broker. It is also possible for a trader to place an order to sell a currency they have not purchased and more.

Trading Strategy

What happens next is determined by the trading strategy of a trader. It is possible a trader may want to let time pass until the currency they have purchased increases in value. Once a specified amount of profit has been accumulated, a trader can then close the order. This is when a broker could begin selling the previously purchased euros for US dollars.

Analysis

Many experienced traders believe analysis is the key to success in foreign exchange trading. Some believe it is the only thing that can lead to success. Two types of analysis are commonly utilized and are known as technical analysis and fundamental analysis.

Technical Analysis

This is good for long term as well as short term trading strategies. It is popular with quick-style traders. These are traders who get their profits from participating in the volatility of trading on daily Forex. The benefit of technical analysis is how it enables analyzing quantifiable information derived from the market.

The problem with this information is how it has already impacted the market. Properly using this information requires knowing how previous price formations can  impact future price formations.

Fundamental Analysis

This investing strategy involves a country’s GDP (Gross Domestic Product) and takes into consideration a country’s interest rates, unemployment rates, amount of exports as well as natural disasters, elections, economic advancements and more. Careful consideration is given to a country’s economic supply and demand.

To use this analysis properly, a trader will need to have an understanding of international economics. They will need to anticipate deals with factors not accounted for by the market. This is best for long-term trading and investing.

Foreign exchange trading can be challenging when it is first attempted. The idea of trading one currency for another requires unique trading skills. It is the type of trading that involves a sell and buy in each trade. The main driving force in Forex is its structure of key players as well as market analysis. It is a market where traders who learn how to successfully use Forex will experience no limits on potential profits.