Did you know that the Forex market’s daily volume was about $6 billion in 2019? It is also expected to grow at a CAGR of 7.5% from 2021 to 2026. This article will cover more about Forex trading, including its definition, its market, and working.
Understanding Forex
Foreign exchange, also called Forex or FX, refers to trading two different currencies with one another, for instance, exchanging the South African Rand (ZAR) with the Indian Rupee (INR). The market players are made of sellers along with the buyers that carry out these currency exchanges via the Forex market.
Whereas some Forex is done for practical reasons, many currency conversions are made to maximize profits. Due to the massive quantity of cash exchanged daily, some price fluctuations can be very unpredictable. The volatile nature of Forex attracts because it increases the possibility of huge gains.
Among the most significant measures of a country’s economic health is its exchange rate. A high rate indicates that they can readily import or purchase products and services, whilst a low rate indicates that they can easily sell or export.
Types of Forex Markets
The FX market encompasses currency trading activity in numerous exchanges, organizations, and banks across the globe. The FX market is divided into three categories:
- Spot FX Market: Spot FX refers to the buying or selling of foreign currency ‘on the spot.’ The exchange is done at the same moment the trade is finalized. The currency pair is bought and sold according to the current market rate or the spot price.
- Forward FX Market: This involves a legal agreement that fixes the exchange rate for the exchange of a currency at a specific period.
- Future FX Market: These are futures contracts to purchase or sell a particular currency amount at a specific price and time.
Several participating traders intend to make profits from the price movements instead of depositing their currency.
Forex Pair
In an FX pair, the first currency is the base currency, followed by the quote currency. The logic behind the pairing is based on its nature of selling one to obtain another. Forex trading usually entails selling one currency to acquire another, so it is quoted in pairs. Every pair has a 3-letter code that contains 1 letter for the currency itself and the remaining two letters for the area.
Key Motivators in the Forex Market
Since foreign exchange is the most liquid market and operates at a global scale, it is a challenge to anticipate exchange rates, mainly due to the numerous factors influencing price fluctuations. Similar to other financial markets, Forex is largely driven by the supply and demand curves – which we have discussed below:
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