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What is Forex trading
Forex or foreign exchange can be defined as a network of buyers and sellers who exchange currencies between themselves at an agreed upon price. This is how individuals, companies and central banks convert one currency into another - if you've ever traveled abroad, you've probably made a Forex transaction.
While much foreign currency is converted for practical purposes, the vast majority of currency conversions are done for the purpose of making profits. The amount of currencies that are transferred daily can lead to significant fluctuation in the price movement of some currencies. This volatility is what makes the Forex market attractive to traders: it brings great opportunities to make great profits, and also involves increased risks.
Explore a host of other benefits of Forex trading
How do currency markets work?
Unlike stocks or commodities, Forex is not traded on exchanges, but rather directly between two parties in the over-the-counter (OTC) market. The Forex market is managed through a global network of banks distributed among four main Forex trading centers in different time zones: London, New York, Sydney and Tokyo. Since there is no central location, it is possible to trade Forex 24 hours a
Spot Forex market: The physical exchange of a currency pair, which occurs at the specified point for settlement of the trade - that is, immediately - or within a short period of time.
Forward Forex Market: In which a contract is agreed to buy or sell a specific amount of currency at a specific price, to be settled on a specific date in the future or within a set of future dates.
Forex futures market: in which a contract is agreed to buy or sell a specific amount of a specific currency at a specific price and a specific date in the future. Unlike futures contracts, futures contracts are legally binding
Most traders who speculate on Forex prices do not plan to take delivery of the currency itself, instead they make exchange rate predictions in order to take advantage of price movements in the market.
What is the base currency?
The base currency is the first currency in a Forex pair, while the second currency is called the quote currency. Forex trading always involves selling one currency in order to buy another, which is why it is listed in pairs – the price of a forex pair is the value of one unit of the base currency in the quote currency.
Each currency in the pair is listed as a three-letter code, with the first two letters usually standing for the region, and the third for the currency itself. For example, GBP/USD is a currency pair that involves buying the British pound and selling the US dollar.