A Complete Guide to Understand Forex Market!

What is Forex Trading?

Forex is the settlement of transactions in any one currency for delivery of another. Its settlement system is mainly used by banks, funds, and individual traders to help them invest in stocks, commodities, currencies, trade borrow, lend borrow, lend cash or other financial instruments. Trading foreign exchange on the Forex market can be an exciting and profitable opportunity, but it is also risky. With good knowledge of operating in the marketplace, you will significantly reduce your risks. Forex trading is a challenging and complicated process that requires research, and every trader needs to understand the basic concepts before starting to invest.

For many first-time traders, the Forex market seems confusing. Forex directly refers to the Foreign Exchange Market; it's the place where you can trade currencies from all over the world. When you trade Forex via a trading platform, you buy one currency and sell another simultaneously, which is why currencies are always displayed and quoted in pairs such as EURUSD. Various factors such as economics and geopolitics influence the Forex market, meaning exchange rates fluctuate, so currencies rise and fall against each other. By forecasting the direction currency are likely to take, you have the opportunity to make a profit. So, you might decide to buy the Euro and sell the US dollar, anticipating that the Euro will rise versus the dollar. You buy a number of units of euros for your dollar, and your forecast proves correct, and the Euro does rise, so you close your trade and make a profit.

Remember, though, if you are wrong and the Euro falls against the dollar, you will lose the money. Forex trading is full of opportunities; it is the largest and most liquid market, trading over 5 trillion dollars every day. This high liquidity makes it easier to buy and sell currencies. Forex is also a global market. One highlighting aspect of this international market is that there is no central marketplace for foreign exchange. It starts after 6:00 am Sydney time and ends at 5:00 pm Friday at New York time. It means you can trade 24 hours a day, five days a week. The currency pairs are traded worldwide in the major financial centres of London, New York, Tokyo, Zurich, Paris, Hongkong and Sydney. With the influence of geopolitics, economics, as well as inflation and interest rates, this market offers enormous opportunities.

Advantages of Forex Trading:

• A trader can trade 24 hours a day.
• It is a market with high liquidity.
• Leverage can make your money go further.
• Trade with a wide range of currency pairs.
• Accessibility of tools to help you trade.
• Hedging with Forex.
• High volatility.

Types of Forex Market & How does it Works?

There are five types of forex market:

Spot forex market:

These are the quickest transactions involving currency in the foreign exchange market. The physical exchange of a currency pair is conducted at the exact point, and the trade is made, i.e., on the spot or within a short span of time.

According to the estimate of Bank of International Settlements (BIS), the daily volume of spot transactions is about 50% of all the transactions in the forex market. Major participants on the spot exchange market are commercial banks, central banks, dealers, brokers, arbitrageurs and speculators.

Forward Forex market:

A contract is mutually agreed to buy or sell a specific amount of currency at a specified fixed price, to be settled at a set date in the future or within a range of future dates. The forward market is very valuable in hedging and speculation. However, there are some minor disadvantages associated with the Forward forex market, they are:

• Lack of centralization of trading
• Illiquidity
• Counterparty Risk

Future forex market:

A contract is made between two parties to buy or sell a specific amount of currency at a specified date in the future. Unlike forwards, futures contracts are legally binding. There is no counterparty risk involved. The future forex market is highly liquid as an unlimited person can enter into the same trade.

Options market:

It is a contract that is made to give the buyer of the option the right but not the obligation or compulsion to buy or sell the underlying at a future fixed date and at a fixed price.

A call option offers the right to "buy", and the put option gives the right to "sell". As currencies are traded (buy and sell) in pairs, one currency is traded and another sold.

As the term suggests, Swaps are simply the instruments that permit the exchange of two streams of cash flow in two different currencies. It involves the exchange of a series of payments between two parties.

What is Base and Quote currency?

Base Currency

A Forex currency is always quoted in pairs. These are two different currencies: the first one in a pair is called the base currency. For accounting purposes, a firm or trader may use base currency as the domestic currency. Base currency denotes how much of the quote currency is required to get one unit of the base currency. For example, in an AUD/USD currency pair, the Australian dollar would be the base currency followed by the "USD", which would be the quote currency.

Quote Currency

It is also commonly known as the counter currency. It is the second currency in both a direct and indirect currency pair and is utilized to calculate the value of the base currency.

The quote currency is represented after the base currency in the pair when currency exchange rates are displayed. A trader can quickly determine how much of the quote currency they require to sell to buy one unit of the base currency.

Also read: What is Currency Pairs?

What moves the forex market and how?

Forex is the largest fiscal market globally and the most volatile. There are countless opportunities to trade, but one must know what moves the currency prices to make the most of them.

Forex is affected by the shift between supply and demand. As a trader, there are some key aspects of the forex market that need to be considered before trading a currency pair. Here are some key factors that move the forex market:

Government Announcements

The economic health of a government affects the currency pair. Reports such as Unemployment numbers give us an idea of the economy of the forex market to a great extent.

Interest rate decisions

Announcements from central banks on interest rates and how they see their economy also play a significant part in short-term or long-term decisions.

News and Market Sentiments

Positive and negative markets both play an influential role in the dynamics of the forex market. This news drives the common people's sentiments, which in turn influences the forex market.

How does forex trading works?

Forex trading is the settlement of transactions in any one currency for delivery of another. Its settlement system is mainly used by banks, funds, and individual traders to help them invest in stocks, commodities, currencies; trade; borrow; lend; borrow or lend cash or other financial instruments.

Forex Trading Explained in a Nutshell

Forex is the global market where the 24 hours flow of money is converted into euros, dollars, yen etc. It is the act of buying one currency with another in the hope to trade at a favorable price.

Though it seems simple, but overtime, there has been an increased level of volatility and complexity. Traders need to be very smart and keen to react quickly during situations such as natural disasters.

Spreads and Lots in Forex

Take a simple forex trade of $500 USD/EUR. A trader decides that the EUR price is too high and wishes to short sell one lot (10,000 EUR) of EUR/USD. If the trader did not buy back his position before the spread had exceeded 10-15 pips, he would be generating losses on this trade of 5-7 Euros per pip.

Leverage in Forex

Leverage is an aspect of trading that investors take advantage of. Leverage is the quantity of purchase amount allocated to each share, depending on the broker's decision to adjust the risk limit. Investors can use this system to increase their market exposure by 2-3 times.

Margin Requirements for Margin Trading in Forex

The amount of collateral is required to trade on margin varies by broker, but in most cases, it is set in percent of the traded asset in question. For example, in most trading accounts in the United States, USD 500 or 100% of the margin is needed for trading USD 10,000.

Most Popular Forex Trading Platforms

In addition to forex trading, one can also trade on many international markets of stocks and shares. You will be able to utilize the same strategies as with forex trading, except for one thing – you will not be able to lift financial constraints.

There are a lot of brokers on the market whose services don't differ too much from each other. What ultimately decides is a very large number of factors, but a substantial part plays the fact if the broker is well-established (known) in the market or still rather new. In other words, traders will configure the MT4 forex trading platform to be able to execute their trading strategies. They can do this by defining what trading symbols to trade, what trading markets you trade from, and then defining trading orders and specific trading actions that they want the system to take when a particular trading symbol or market is reached.

MetaTrader is a trading software used by brokers for trading securities and derivatives. Dow Jones purchased it in 2001. The MetaTrader software supports a large number of financial instruments and enjoys a wide variety of indexing methods.

MetaTrader 5 is the latest version of Windows-based MetaTrader, which now offers web-trading from any device with an internet connection utilizing MetaTrader 5's web platform with HTML5 as its backend.

MT5 clients can trade online from any PC or mobile device that has an internet connection, including Windows desktops, Apple iOS and Android smartphones and tablets, the web browser inside Facebook Messenger 17+, and popular social media channels such as Twitter, LinkedIn Instant Articles

Explore and Trade Forex with CapitalXtend 

Forex trading requires a lot of gears and that is where CapitalXtend comes into the picture. CapitalXtend provides smart gears to their trades which help them to handle all kind of trading situations. It also offers tightest spreads and ultra-fast execution speed. In the age of continuous changing world, a globally regulated forex broker like CapitalXtend offers safe and secure payment option where one can deposit and withdraw money easily. CapitalXtend is also known for its innovative tools and it has won "Most innovative broker of the year" PAN Asia award. It is evident to say that CapitalXtend has remained a trusted brand for thousands of brokers all over the world. 

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