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Currency Trading: What is Forex Trading & How Does it Work?

Trading Account: Definition, Eligibility Criteria and Features

Currency is the medium of exchange in any country to buy and sell products, and services or execute any kind of commercial transaction. And each country has its own currency with its own value and price depending on the economic conditions, the geopolitical situation, instability, international trade, cash flow and the demand for the currency in the market.

Currency Trading is also Called Forexor FX trading. Forex is an abbreviation of "foreign exchange", as is FX. These terms are used as common shorthand while dealing with currency trading.

Being one of the vital instruments of the economy it is also used for trading in the market just like equity and commodity markets.

Yes, the currency market or forex market is mature enough with more than $4-5 trillion in notional value exchanged daily. And the most interesting thing is currency is traded 24 hours and 7 days making it the globally most liquid asset in the market.

What is Currency Trading?

Currency trading is the process of buying and selling different countries’ currencies in the foreign exchange market. But instead of a centralized exchange like equity or commodity, currency trading is conducted electronically over the counter (OTC).

OTC means all the transactions take place not physically anywhere on a centralized exchange, but instead occur through computer networks between the traders globally sitting at any place having the internet access and system to run the trading software.

Internationally, in currency trading, many participants are involved in buying and selling currencies. But in India, currency trading participants like the central bank (RBI), comprise banks, corporations, investment bankers, hedge fund houses, retail forex brokers and investors are involved.

How Does Forex Trading Work?

Just like buying and selling securities in the stock market, forex trading also takes place. The only difference is currency trading done in pairs such as USD/EUR (American currency US dollar vs European country’s currency Euro) or other popular currencies like GBP/JPY (British pound/Japanese yen) or USD/INR (US Dollar vs Indian Rupee.

And while forex trading one currency is bought and another is sold with the motive to gain profits and when you've bought currency is moved up against the currency you sold you get some profits earned. To make it understand clear let’s take an example.

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    Forex Trading Example

    To make it understand better how Forex trading works, understand this. If an exchange rate between the US dollar and Euro is 1 to 1.20 and you buy 1000 UD dollars, you have to pay 1,200 Euros. If the euro currency rate moves later moves to 1 to 1.30, you can sell those US dollars for 1,300 Euros and generate a profit of $100 with this currency trading.

    Forex Markets Trading Hours

    The forex market operates 24 hours non-stop and continuous trading takes place across the world run to buy the global network of banks. These banks network spread and managed through four major trading centres located in different trading time zones - London, New York, Sydney and Tokyo making currency trading possible round-the-clock.

    In earlier times only institutional firms and large banks were involved in forex trading and also acted on the behalf of the client. But the scenario has changed now, retail traders and investors are also aggressively participating in the forex trading market.

    What Moves the Forex Market?

    Just like other financial instruments trading in the market, the demand and supply of the buyers and sellers determine the price of the currencies in the forex market. However, other factors at macro levels also play a vital role in the price change of a currency.

    The demand and supply of a particular currency are influenced by the political condition of the country, interest rates, speed of economic growth, and central bank policies like monetary policy, fiscal policy, and foreign exchange reserve kept for the country.

    The Forex market is open and runs 24 hours a day and five days a week, giving the traders opportunity in the market to react to any news affecting the stock market until much later. As currency trading mainly focused on hedging or speculation, traders must take action in the market that can affect the price of currencies sharply.

    Major Currencies in Forex Trading

    Though, there are more than 170 countries globally US Dollar is highly involved in the majority of the forex trading market. After US Dollar, Euro is the second most popular currency in the forex market accepted in 19 countries in the European Union.

    Just like the stock market a three-later ticker symbol is assigned to each currency that's made it easier for traders to recognize the currency at a glance.

    UD dollar is assigned as USD, Euro with code name EUR, while other major currencies that are popular in the forex market for trading are the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD), the Swiss franc (CHF), the New Zealand dollar (NZD) and Indian Rupee (INR).

    As we already told you forex trading takes place when a combination of the two currencies is exchanged. Below you can find the top seven pairs of currencies that account for 75% of total trading in the forex market and are known as major currencies.

    Top Currency Pairs for Trading

    • EUR/USD
    • USD/JPY
    • GBP/USD
    • AUD/USD
    • USD/CAD
    • USD/CHF
    • NZD/USD
    • USD/INR
    • EUR/INR
    • GBP/INR

    Different Ways of Forex Trading

    Trading in the forex market takes place through three different formats - spot, forwards, and futures markets. The cash or spot market is the largest of all three markets as it is the “underlying” asset on which all forwards and futures markets are based.

    When we talk about the forex market, it usually refers to the spot market. While the forwards and futures markets tend to be more popular among financial institutions that use to hedge their foreign exchange risks out to a specific future date.

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      Spot Market: This is the main market in forex trading where all the popular currencies are swapped and exchange rates are determined on the real-time basis depending on the demand and supply of the various currencies in the market.

      Forward Market: Some traders don't trade in the spot market, instead enter into a binding (private) contract with another trader and lock the rate of exchange for an agreed amount of money or currency on a future date.

      Future Market: Similarly, traders can choose for the standardized contract to buy or sell a predetermined amount of a currency at a particular exchange rate at a date in the future. Just like the forward market, this is done in exchange rather than privately.

      Forex traders want to hedge or speculate against future price changes in a currency using the forward and futures markets. And based on the exchange rates in the largest forex market spot market, forward and future market rates are determined.

      Is Forex Trading profitable?

      The size of the forex trading market is much larger than the stock, futures, and options markets combined. And when currency trading is done with the right pairing of currencies at the right time it gives profit to traders.

      Hedgers and speculators make profits in the forex trading market. Speculators speculate on the value shifts in the currency for the short term to make profits. While on the other hand, hedgers take a position in the forex market to guard against currency fluctuations that won’t affect their international transactions or investments adversely.

      However, the profitability in forex trading depends on more or less using the fundamental as well as technical indicators with the right trading strategies. And to trade in forex with the right strategy you need the right platform providing such strategies.

      Currency Trading Strategies

      Trading in the forex market becomes profitable only when you go with the right strategy. As these tested currency trading strategies can help you to determine the entry and exit points while trading. And if you trade through a trading strategy you can get a better understanding of the potential profit or loss and some money from currency trading.

      Top Forex Trading Strategies

      • Price Action Strategy
      • Swing Strategy
      • Range Trading
      • Scalping Strategy
      • Order Block Strategy
      • Trend Reversal Strategy

      These are the top best forex trading strategies you can use while trading in the forex market trading. To know about these forex strategies keep reading the blogs page or visit our website we will later discuss these strategies in detail and how to apply them.

      Also read: Best option strategies 

      Risk in Forex Trading

      All types of tradable financial instruments have their own risk and return appetite. Similarly, trading in the forex market also poses a major risk of abrupt fluctuations in currency prices.

      Moreover, forex trading requires leverage and traders use the margin, it is an additional risk to forex trading compared to other types of assets.

      Forex Trading in India

      In India currency trading is not physically settled means there is no actual delivery of the currency on expiry, instead, currency futures are cash settled. Hence, when we speak about forex trading or currency trading in India, it refers to currency futures trading.

      In India, currency futures are traded on separate platforms offered by the country's top exchanges like the NSEBSE, and MCX-SX. In India currency trading usually happens from 9.00 am to 5.00 pm. And if you are looking to trade in the forex market you need to open a forex trading account with your broker and Moneysukh is the authorized broker for currency/forex trading.

      Popular Terminologies in Forex Trading

      Before you enter into the forex trading market you should be aware of various terminologies that are often used in the currency market.

      Below we have given a brief about the most commonly used forex market terminologies, it will not only help you to understand the currency market better but also make your various concepts clear while understanding the currency market.

      Currency Pair: In the forex trading market, one currency is traded against another, hence they are called pairs, like USD/INR is paired. And these 3 types of currency pairs, with the name - major pairs, minor pairs, and exotic pairs.

      In Major currency pairs only developed countries are paired with each other, in minor pairs develop vs developing countries' currency is paired. While in exotics pairsa developed country against an underdeveloped country is paired.

      Pip: Stands for – Point-in-price, which is the smallest possible price change within a currency pair. And in the forex market prices are quoted out to at least four decimal places, a pip is equal to 0.0001 and any change in the currency valuation up to four decimals is considered for price fluctuations in the currency trading market.

      Bid & Ask Price: Just like equity and commodity market, Bid price is the price for buying the instruments and here currency of course talking about the same.

      Spread: Similarly, the asking price is the price for selling the base currency and the difference between these two (bid & ask price) amounts, and finally, the value trades executed is called the bid-ask spread.

      Lot Size: Similar to derivatives markets in equity or commodity, currency trading is also done in the lot size. A lot size is the minimum quantity of units that can be bought or sold under a contract.

      In the currency market, a typical lot size is 100,000 units of currency, however, there are micro (1,000) and mini (10,000) lots also available for trading.

      Leverage: In the currency trading market, leverage is the terminology used for borrowing money more than what they have in cash as they only need to pay a margin instead of paying the full amount. This allows traders to participate in the forex market if they don’t have money otherwise required.

      Margin: To use the leverage for trading all the traders must put down some upfront money as a deposit which is called the margin.

      Base Currency: As we told you currency trading is done in pairs in which one is the base currency and another is the quote currency. If you see USD/INR, the currency on the left is the base currency and the one on the right is the quote currency.

      Quote Currency: In the above example, the currency on the right-hand side (INR) is quoted as the Quote currency. In a currency pair, the value of the base currency is always remains the 1.

      Also read : How to Open demat account

      Key Takeaways about Currency Trading 

      Currency trading in the Forex market is take place all over the world allowing the traders to make money by booking some profits with the change in the value of the currency.

      You can use currency trading for hedging to cover the currency risk if you deal in international trades.

      Companies and investors both get benefits from currency trading but, any kind of abrupt fluctuations in the currency market can lead to huge losses.

      Hence, while dealing in the currency market, take advice from experts and use the right trading strategy to avoid any losses and maximize your profit and take advantage of variations in currencies value.

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