Foreign Exchange represents a process of buying and selling different national currencies. It is a relatively new section of the market that enables people from all over the globe to trade everything from Australian dollars to Japanese yens. And while this market is one of the largest in the world, there are still a lot of people who keep googling “what is Forex and how does it work?”. Here at GMChain, we gathered all the need-to-know information to provide you with a full picture of what FX is.
Many parties take part in the Forex trading ecosystem, including companies, central banks, hedge funds, investment management firms, retail brokers, and traders. Each of them contributes to the everyday functioning of this huge market.
Let’s crunch some numbers associated with Forex. Thus, as the statistics go, there are more than $5 trillion transactions traded here daily. It is 25 times more than global equities trading volumes.
Sounds impressive, isn’t it? We bet you want to learn more about how the Forex market works. Then keep reading to find out all the details.
Distinctive features of this game-changing trading platform
You may wonder what is so unique and special about the Forex market. Well, the primary distinctive feature of FX is the absence of one market exchange. Rather, it is a global network of both brokers and computers that tracks the overall growth and development. This highly structured system takes a lot of the pressure off, and more importantly, ensures safety and discretion for all parties. It helps to build a trusting relationship between the brokers and traders.
The Forex market is made up of two primary levels. One of them is the interbank market, where large financial institutions trade currencies on behalf of the clients. The other part is the OTC market, where traders can do their exchanges through online platforms, such as fxvc.eu.
One more distinguishing feature of FX trading is that you can get a much higher level of financial support here if compared with other instruments. The following information will come in handy if you want to learn more about how leverage works in Forex. In layman’s terms, leverage is the use of borrowed funds by traders who want to increase their positions. A borrowed capital allows accessing a larger portion of the market with a relatively small deposit. Thus, you receive a real chance to win a high return for a small up-front investment. However, it is worth mentioning that a trader is risking to lose as well. So, leverage is so-to-call a double-edged sword.
Forex trading – Everything from A to Z
So, if Forex trading is the new black, what are the top currencies on it? For starters, the US dollar is considered to be the most traded currency in the world. It is a part of 85% of transactions, with the euro trailing it with a modest 39%. What makes the dollar persist on the market despite difficulties?
Well, there are several key factors contribute to it. The US economy is one of the strongest ones on the planet, even in its worst days. Just think of the previous year. The trade war was at the top of the heat, and the US dollar was still able to rule the Forex market. No matter the geopolitical turmoil, this currency shows time and time again that it is here to stay. Not many things can spoil its worth. On the other hand, the Japanese yen is considered to be the so-called “safe-haven asset,” due to its stability and high liquidity. The investors usually turn to it in times of hardships on the market.
How did the Forex market come to be anyway? Before World War I, precious metals, such as gold and silver, were backing up the currencies. This system did not work during the war, so a new one came into play. First off, three new international institutions were created – IMF (International Monetary Fund), the GAAT (General Agreement on Tariffs and Trade), and the IBRD (International Bank for Reconstruction and Development). They were crucial in the transition from gold to international currencies, starting to rely on each other.
The Central Bank
Still, though, the dollar kept its value somewhat secure with the equal reserves of gold in its central bank. You may know it better as the Federal Reserve. Back then, however, when the Forex market just came into the spotlight, it was mostly aimed at governments and larger companies. Today, anyone trades here! You don’t have to be a part of a bigger establishment to fulfill your trading dreams. These days, many investment firms offer a unique opportunity for traders to distinguish themselves as valued participants on the FX market. When people learn how Forex trading works, they do everything possible to become part of this innovative system and scale their success.
The Forex market – A symbiosis between innovations and original approach
Boasting many years of experience behind its belt, FX is considered to be a unique trading platform on the market. It opens up the whole new world of opportunities for all market participants, including an ability to trade different assets and track their performance in real-time. What is more, numerous educational tools enable everyone to become a part of Forex while getting a stable income.
However, there is one more specific feature that makes Forex stand out. It operates 24 hours a day, 7 days a week, all around the globe. So, there is no need to rush or worry that you will miss something good. This significantly differs FX from other trading platforms. For instance, the stock market usually closes in the afternoon. However, others are trying to stay competitive, closing during the key hours of the trading day. This generates a whole new level of engagement with different types of traders.
Major currency pairs in the Forex market
So, how does Forex work? It is not only the place for all the transactions but also a crucial part of determining the value of a currency. Though many fractures contribute to it, such as economic and political, everything begins and ends with the market itself.
Currencies are always represented in pairs – for example, USD/EUR. There is also a value attached to it, which represents the amount of which one currency is expressed through the other one in that pairing. What is more, each currency has its value, which you can analyze through an index. The trading of currencies is accomplished with the help of lots – micro, standard, and mini. Through lots, each currency is different than it would be if you’d, for example, went to the bank and wanted to exchange one currency for another. Forex online trading is completely different from this transaction, though it applies similar rules when it comes to their main instruments – currencies.
The technologies behind the Forex trading system
Despite the market working around the clock, it doesn’t mean that whatever you do on it is a done deal. It takes a lot of hard work and thought-out moves to obtain the final result. In addition, the time of day you engage in trading determines the volume for the currency you choose. This information should be considered when one is deciding on the timing of entering the Forex market.
A special branch that researches the currency pairs and all that makes them unique is called Forex analysis. It aims to determine a direction a certain trend will go next. Of course, it is not an easy task to make such predictions. However, it is a source of state-of-the-art development as time passes, and new things on the market keep emerging.
So, traders, as well as companies and hedge funds, use Forex analysis to decide on their particular trading strategy. There are different ways to do this. While some analysis is manual, others require the use of computers and software that researches historical data. Either way, each independent trader is able to choose their own approach to the matter while we recommend combining both.
Forex trading – How does it work and what is the main objective in it?
Forex analysis aims to help you make a profit by predicting the currency pairs’ movements. There are currently over 150 global currencies, which makes this method somewhat tricky to come by. The most commonly used ones are euros (EUR), pounds (GBP), and the Australian dollars (AUD). Trailing close behind them are Japanese yens (JPY), Canadian dollars (CAD), and Swiss francs (CHF). Other currencies are not obvious right away but also quite important. You can check them out for yourself on the fxvc.eu. This platform provides a full list of available currencies.
Numerous other factors that affect currency levels. Everything from price movements to political and economic events may cause changes. The country’s level of GDP, inflation rate as well as employment statistics and the Central Bank statements may contribute to your experience in Forex trading.
What to know about Forex market analysis
Three most common types of analysis should be taken into account when it comes to Forex trading:
- Technical analysis. It assesses the past price movements of a certain currency. This analysis is aimed to predict where it will go next so you can assume your strategy. This way, you can recognize patterns more easily.
- Fundamental analysis. This analysis examines the factors that are affecting the economy of a certain country. Taking into account everything from the inflation rate to the gross domestic product, it helps to predict the future factors which may form and affect a certain currency.
- Sentiment analysis. This analysis is used to understand if people are buying or selling a particular currency, and which factors may be contributing to such behavior. It is also known as crowd psychology. In other words, people tend to reenact the behavior of those ones whom they admire or those with whom they have close relations.
The bottom line
The currency market is certainly one of the most exciting parts of any market. With many factors that contribute to it daily, it is no surprise that it is always open and welcoming to traders of different origins and trading goals. To succeed in a Forex trading career is much easier than you might think. All you need is patience, eagerness, and specific knowledge. So, if you’re ready to risk, you’re bound to succeed.