What is Forex Trading and How Does it Work?

If you have seen unfamiliar words like currency pairs, majors and crosses, and Forex appearing in the morning headlines, you might be wondering how you can get yourself back in the know. Fortunately, there are many online resources that can help you learn about Forex and the benefits of online trading.

What is Forex?

Forex is an abbreviation for the words Foreign Exchange and it is the exchange of one currency for another. Most people who have traveled overseas have engaged in a Forex transaction at some time or another by selling their domestic currency for foreign currency in order to buy goods and services abroad.

Who trades Forex and Why?

Forex traders can be classified into four categories: central banks, banks, corporations and retail traders. Local banks are considered central banks and trade Forex in order to prevent their currency from appreciating too much. Banks like Goldman Sachs trade Forex in order to provide liquidity to corporations. Corporations, like Ford and Honda, trade Forex in order to buy raw materials from a foreign distributor and retail traders are the general public who speculate in the forex market to make a profit. Corporations and banks also trade Forex to hedge a position that could be otherwise exposed to currency risk. ECN Premium

Currency pairs

A currency pair is the two currencies that are being exchanged in a transaction. There are three classifications for currency pairs: majors, crosses, and exotics. In order to be classified as a major pair, the pair must include the currency from the United States on one side of the equation with the other side including either the Euro, the British pound, the Japanese yen, the Swiss franc, the Aussie dollar, the New Zealand dollar or the Canadian dollar. Crosses are currency pairs that do not involve the U.S. and exotics are pairs that may use the currency of the U.S. but are not considered majors as they also include developing countries.

How do currency pairs work?

When viewing the exchange rate of a currency pair, the first currency abbreviation is called the base and the second is called the quote. Next to the currency pairs are two sets of numbers, the first price is referred to as a bid while and the second is normally referred to as the ask. The bid price is the amount it costs to sell, or exchange, one component of currency from the first country using currency from the second country. The ask price is the amount it costs to buy, or exchange, one component of currency from the second country using the currency from the first country. The buying and selling of exchange rates is the investment that one of the currencies will strengthen over the other.

Which broker should I work with?

There are many reputable brokers available to assist you with online trading. ECN Premium provides years of experience and expertise and is among the leaders in the world. Created by traders, for traders, they combine the most enjoyable experience while ensuring a safe and successful trading environment. They offer a large selection of trading solutions and strive to provide exceptional service.

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Melissa Thompson

Melissa is a mother of 2, lives in Utah, and writes for a multitude of sites. She is currently the EIC of HarcourtHealth.com and writes about health, wellness, and business topics.