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What Is Forex & How Does It Work?

Will Ellis

Last Updated on January 1, 2023

Were you aware that there is an entire world of investment and trading that is making trillions of dollars a year? It’s true, there is an entire type of exchange that reached $6.6 trillion in daily trading alone in the year 2019.

And yet, despite it being so successful there are many people who have never even heard of this type of market and the trades that go on in it.

It’s called forex and it’s a market that is full of possibility and an enormous amount of money flowing through it. And no matter where you live or what type of currency you use, you can invest into this market and find ways to increase your bottom line in a huge way.

The forex market has become the most liquid and largest financial market in the entire world. That’s $6.6 trillion mentioned above is an amazing amount when you consider that the forex market has grown from $5 trillion just a few years ago.

With so much money floating around in forex, you can assume that there is some waiting for you. And you’d be right, you certainly have a chance of receiving a huge financial windfall if you play your cards right and approach this market in the right way.

But what is the right way to approach forex? What are the biggest mistakes people make with it and how do you avoid them? How do you turn the forex market into your next big financial adventure that only helps and never harms your investment portfolio?

Table of Contents:

What Is Forex
How Does Forex Trading Work
And What is the Forex Market
Types Of Forex Trading

What Is Forex? 💱️

What happens when you combine the words “foreign currency” and “exchange”? You get “forex” of course. Yes, forex is a combination of those two words and it’s the process of exchanging one type of currency into another.

Why do people change one currency to another? There are plenty of reasons why. Usually it has to do with commerce or trading, such as people do in a market like the American stock market or the ASX 200.

Additionally, some people invest in the forex market because they are going to do a lot of business in another country. If you are a huge wine fan and you want to buy only the best bottles from France, you will need to have a good amount of French currency. That can be possible via the forex market and it could result in you having a lot more money than simply doing a one-on-one conversion.

Every single day all over the world, there are hundreds of foreign currencies that rise and fall in value related to one another. Just like any other type of market, savvy investors stand a chance to turn a profit if they invest in these currencies at the right time.

Because the forex market really exists all over the world, it is running 24/7, which is a huge distinction from so many other markets in the globe. From Australia to China to Russia to Canada, America, and beyond, there are so many different currencies that are offered on the forex market.

How Does Forex Trading Work? 📊️

As you would imagine, forex trading is a lot like selling or buying or trading any other commodity in other markets, like securities. However, the major distinction here is that forex trading is always done in pairs, which makes sense since it’s an exchange from one to another.

For example, you may be trading the euro for the American dollar (EUR to USD) or you could be exchanging the yen for the pound (JPY to GBP). You are selling one for the other and you make your profit when the currency you just bought moves up and gains against the currency you sold it for.

And What is the Forex Market? 🔎️

Of course, any type of exchange will need to be done on a market. In this case, forex trading is done via the forex market, which is huge and unwieldy and very complicated and confusing for newcomers. That is why people who haven’t done much trading before need to really understand the forex market before they make their first exchange.

The thing that makes the forex market so interesting – and exciting – over other markets is that there is no central headquarters for it and not one marketplace. Instead, all trading on the forex market is done electronically, which means that every exchange is done through computers and through a network that is connected to traders all over the world.

Over the years, the forex market has grown larger and more powerful and robust. Today, currencies are traded across Earth from the financial center of cities like Paris, Singapore, Tokyo, Zurich, New York, Hong Kong, and more.

Since each of these locations are operating in different time zones, you can check into the forex market at any hour of the day and find a bustling center of activity. If you check into the forex market at 2 AM, you will see tons of business, just as you would at noon, 10 AM, 4 PM, or really any time of the day.

There are three primary venues that people trade on the forex through. It is important to know about all of them and what sets them apart, makes them similar, and decide which is right for you.

Spot Market

The first venue that people use for forex trading is the spot market. This has always been the biggest of all the avenues to trade. The prices on the spot market are all dictated by basic supply and demand and decided upon by several factors, like interest rates in certain countries, the performance of economies, political and global situations and current events, and the perception and beliefs of traders.

In a spot market, a finalized deal and exchange is known as a spot deal. One part will give the agreed-upon currency to the buying party. Upon the closure of the position, the settlement is given in case. Typically, a spot deal takes about two days to complete and be settled.

Futures Market

As you would assume, a future market is where future contracts are created and sold based upon an agreement between two parties that will deliver the currencies at a future date for a settled price.

These future contracts have specific details that are hammered out by both sides, including how many units are being traded, the date of delivery and the date of settlement. The market will act as a counterparty in this case and will provide the trader and buyer with clearance and settlement services.

Forwards Market

A forwards market is populated with forwards contracts, which are agreements made in private between two parties for a future date and an agreed-upon price listed in the over the counter, electronic marketplace.

Types Of Forex Trading ➡️

There are multiple ways that people invest in the forex market, some are long and some are short. Some are complicated and some are very simple.

The type of trading that you want to do will depend on the sort of profit you want to make, the sort of time you want to spend, and the amount of energy you want to expel.

Of course, like in all markets, you can employ a long trade method when you are investing in forex. This is when you assume that the currency price will go up in the future and you will be able to make a profit from it.

Conversely, you can always do a short trade, thinking that the price of the currency will actually decrease in the future. You can use technical analysis, business news stories, and professional advice from brokers to determine your strategy as well.

There are other ways for you to trade.

Scalp Trade

A common tactic when exploring the forex market is to do a scalp trade. Here, you would hold your position for a very short amount of time, sometimes only seconds or minutes. By moving fast, you make a small profit when your currency value goes up.

By doing many scalpe trades during the day, you can end up with a sizable amount of profit.

Day Trades

A day trade is another short-term trade when a position is held and then sold within the same business day. This can take minutes or up to hours. Again, like scalp trades a day trade is about a small gain that is incorporated to many others throughout the day.

Position Trade

A position trade is yet another smart approach to the forex market. With it, the trader will hold the currency for a longer amount of time, usually months or even years. Obviously, a trade like this means that you really understand the market, study it often, and have a deep analytical mind that allows you to hold or sell.

Swing Trade

With a swing trade, the trader holds onto the position for longer than a day, but not as long as they do in a position trade. Generally, the position is held for days or weeks.

Because they are longer than day trades, you don’t have to keep a very close eye on the market when you are swing trading. This is more ideal for people who don’t want to be tuned into the market all day long.