• Wed. May 22nd, 2024

What is Forex and How Does it Work?



If we consider the basic meaning of forex, we can say that the forex market is not relatively a new concept and can be traced back to the pages of history. Currency exchanges and barter has been present from ancient time and their evidence can be found around 259BC in ancient Egypt. But, the forex market as we know them today is relatively a new concept.

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The first forex market that was established 500 years ago in Amsterdam stabilized currency exchange rates. This possibility of trading currency freely soon spread across the world.

With the introduction of the Gold Standard in 1875 which was made to preserve the value of the currency, the minting of the national currency was limited. But during the First World War, to meet the expenses, countries had to print more money putting an end to the Gold Standard. During this time, the number of forex trading firms rose from 3 to 71.

During the time of World War II, the successor of the Gold Standard, Bretton Woods was introduced. But with its collapse in 1971, money began to float freely again. By 1973, the state control over foreign exchange ended paving way for complete exchange and a free market. Currently, forex has established itself as the biggest financial market with over $ 4 trillion traded in the forex market per day. But what exactly is forex trade?

What is forex trading?

Forex can be considered as a network of buyers and sellers who exchange currency for a variety of reasons. While many of the exchanges are done for practical reasons like trade, tourism, and commerce, the majority of exchanges are made for making a profit by speculating the currency prices.

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By exchanging one currency for the other, a trader will be predicting or speculating whether the value of a currency will rise or fall.

Currencies are always traded in pairs whose value is influenced by a variety of factors like traded flow, economic, and political events that affect the demand and supply of the currency. These events make some currencies highly volatile and it is this volatility that opens new opportunities for traders.


How does Forex trading work?

While there are many ways to trade forex, they all work in the same basic way: buying one currency and purchasing another. Even though they may look similar to buying and selling of stocks, forex trading is done in pairs such as euro/ U.S. dollar. Here you will sell one currency and buy another and will earn a profit if the price of the currency you bought goes up against the one you sold.

Forex trading was generally done through a forex broker. But with the dawn of online trading platforms, you can now take the benefits of forex price movements through leverage products like CFDs. By using the derivatives like CFD trading, you will be able to take a position on your speculation, whether the market will rise or fall.

While leverage products can boost your profit, it will also increase your loss if the forex market movement is against you. Even though forex trading looks daunting, by following these simple steps you can take your first steps.

Choose the method in which you like to do forex trading

Many forex trading happens between many financial institutions like banks. But for an individual trader, there are two major ways to do forex trading: forex CFDs and trading through a broker. For trading forex, choose the method that suits your style and needs.

Understand how the forex market works

When thinking of trading in forex, you need to learn how the market works. Unlike the traditional exchange-based systems, forex is sold and purchased through a network of banks, called an over-the-counter or OTC market.


Open an account

You will have to open an account with the help of a leverage provider if you are planning to trade through CFDs. Opening an account is quite easy and you won’t be asked to pay funds unless you want to trade.

Make a plan for trading

One of the most important steps in trading is to build a plan, especially if you are new to the platform. A good plan will keep your emotions in check and will help you make rational decisions. You can also incorporate a forex strategy which will help you find opportunities in the market. Once

you make a trading strategy, use the technical tools in which you want to trade. While making a plan, understand the economic announcement and upcoming event that is likely to cause volatility.

Choose your forex platform

Choose the platform on which you would like to trade. A forex trading platform like RoboForex that enables test trading on a forex demo account without investing your own money is a great platform for you to start forex trading. Using these accounts you can test your trading strategies and benefits from cashback programs.

Monitor and close your first position

Once you have selected the platform, you are ready to trade. Open the deal ticket where you can see the buy and sell prices. Based on this, you can decide the size of your position and add limits to close your trade. Press buy or sell if you want to open a long position or a short one respectively. Monitor your position and decide when you want to close it.

Understand what forex trade is and how it works to make the most out of your forex trade.

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Kevin Moore - E-Crypto News Editor

Kevin Moore - E-Crypto News Editor

Kevin Moore is the main author and editor for E-Crypto News.