Forex trading can be an infamous term for you, but in reality, it is a gem for today’s economy. Foreign exchange (also known as forex or FX) is a global market where traders, investors, institutions, banks, companies, speculate on buying and selling world currencies. It is a platform for the conversion of currencies into another. With an average trading volume of over $5 trillion every day, it is one of the largest financial markets in the world, which works for 24 hours a day, 5 days a week.
A humongous amount of foreign exchange is done by traders where the vast majority of currency conversion is undertaken to earn a profit. The amount of currency is converted everyday to change the price swiftly. Its volatility and profits attract traders. However, like most financial markets, foreign exchange is primarily driven by external forces of supply and demand. Often, the fluctuations occur due to:
The changes in the world economy due to money flow rate by Central Banks.
Positive coverage through news reports around the currency, increases its value.
Market sentiment, which is often in reaction to the news, can also play a major role in driving currency prices.
Economic data often spruce up the value of the currency. It indicates the working of the economy and offers insight into what the central bank of the country might do next.
The country’s credit rating influences the value of the currency a lot. A country with a high credit rating can see its currency increase in price and vice versa.
How do currency markets work?
Unlike shares or commodities, forex trading does not happen in exchanges, rather happen directly between two parties in an OTC market setup. The forex market runs by a global network of banks, spread across four major trading centres in different countries: London, New York, Sydney, Tokyo. Because there is no central location, you can trade forex 24 hours a day.
There are three different types of forex market:
Spot forex market: It is an agreement between parties for buying and selling currencies at an agreed price for settlement on the spot date.
Forward forex market: It is an agreement between a trader and the bank to purchase one currency against selling another currency at a fixed price for delivery on an agreed date in the future.
Future forex market: They are standardized future contracts to buy or sell currency at a set date, time, and contract size. Unlike forwards, a futures contract is legally binding.
This was a basic overview of Forex trading. We’ll be sharing more information like these. Connect with us to know more about our forex trading services.
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