What Is Forex Trading And How Does It Work?

Forex stands for Foreign Exchange Market
It is a decentralized global market for currency trading
In Forex, currencies are traded against each other, in pairs of two
There is no central marketplace for Forex exchange

So What Is Forex Trading Really?

Forex trading explained simply: Forex is a global market established for exchanging national currencies. what is Forex trading

Forex, short for the foreign exchange market, is a place where currencies are traded. There are millions of Forex traders around the world. In fact, you might be part of it without even knowing. Currencies are essential for people, as they enable purchasing of goods and services. When you visit a foreign country, you might need to exchange currencies to be able to purchase goods and services there. Let’s say that you are from the USA and decided to have a trip to Europe for your summer vacation, and you take some US dollars with you. To be able to purchase goods in Europe, in most countries, you will need Euro. By exchanging US dollars for Euros, you are basically trading Forex even without realizing it. Because USD is not a locally accepted currency in Europe and many other parts of the world, you will need to exchange it at some point. This shows precisely how important currency trading is. It enables you to purchase goods and services in a different country by simply converting your own currency. A unique aspect of the international foreign exchange market is that there is no central place for exchange. Currency trading is conducted electronically over the counter, meaning that transactions happen thanks to the computer networks between traders globally. As Forex trading meaning indicates, there are two different types of Forex trading. They are retail Forex trading and institutional Forex trading. Let’s discuss each of them and see how they differ.

Retail FX Trading

Retail Forex trading represents one, but a prevalent, part of the larger foreign exchange market. Retail Forex trading gives individuals access to the trading market by speculating the exchange rate between different currencies. Thanks to the development of the online Forex trading platforms in recent years, retail Forex trading has become very popular. There are millions of people who are investing in currency pairs as retail traders. According to the official data from 2016, retail Forex trading represented about 5.5% of the whole Forex market. The number is increasing every year because of the popularity of the market. Understanding what is online Forex trading and how it works can be a bit confusing. Many things go into this market, which is why traders sometimes have to dedicate a lot of their time to research and education. The development of modern technology, most notably the internet, has changed the way people look at Forex trading. Once, only the biggest financial companies, such as banks, were able to access the market. However, thanks to retail Forex trading, this market has become more accessible for everyone worldwide. Online Forex brokers and trading platforms have enabled people globally to trade Forex, and the only thing you need for becoming a Forex trader is an internet connection.

Institutional FX Trading

While Forex trading is very accessible for retail traders, there still is another part of the market, called institutional Forex trading. Institutional traders tend to be more sophisticated traders. While retail traders are often individual traders who are simply buying or selling currency pairs using personal accounts, institutional traders buy and sell currencies for accounts managed by a group of people or even institutions. Although institutional traders had a considerable advantage over retail traders, the advantages have slowly started to disappear. So, what is Forex trading by institutional traders? In fact, it is very similar to retail Forex trading. However, it is taken to a whole another level. These institutions are enormous companies that are full of professionals who are trading Forex for the company. These people are working together to plan the trade, follow the guidelines and execute the trades. A very interesting this about Forex trading is that there was a time when retail traders did not have access to the market whatsoever. A few decades back, only massive institutions were able to invest in Forex trading. In most cases, these institutions were banks. As the market developed, it has become more accessible for everyone around the world. Today, no matter who you are, you can easily invest in Forex trading.

How Does Forex Trading Work?

Forex trading explained quickly: Forex trading involves selling one currency while buying another one. Understanding FX trading and the way it works can be a little confusing for beginners. However, in reality, there is nothing too complicated about it. There are certain things that you will have to do before you start trading Forex. This includes finding a broker, opening an account, making a deposit, and so on. Unlike other trading markets, Forex trading does not take place at one specific location; instead, it is an over-the-counter market and is executed directly between two parties. The market is run by a global network of banks that are from all around the world. The biggest financial centers for Forex trading are London, New York, Sydney, and Tokyo. Due to the different time zones worldwide, Forex trading is available 24 hours a day, five days a week. Most of the Forex traders are speculating and predicting the future price movements to make a profit. When you are trading Forex, you are dealing with currency pairs. The currency pair is made up of two currencies, base and quote. The first currency you see in the pair is called the base currency, while the second is called the quote currency. Forex always involves selling one currency to buy the other. Simply put, the base currency is the currency that you are buying, while the quote currency is the one you are selling. By understanding Forex trading definitions and examples, you can become a better trader. When you are trading Forex, you open a trading platform to register a buy trade. Then, the broker you are using sends your order to the general market, where the order matches a sell trade. After your order has been matched, the trade is executed. Becoming a successful trader is not easy as it involves taking several steps. So, let’s continue by discussing some of the most critical steps you might have to take to be better at Forex trading.

Step 1: Find a Broker

One of the most critical steps that every trader should take is to find a trustworthy Forex trader. Even if you know everything about Forex trading explained and how this market works, finding a reliable Forex broker might still be challenging. Forex broker is a company that will give you access to the trading platform through which you can open and close your positions. There are hundreds of online Forex brokers in the market, but how do you know which one to t