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how forex trading works?

Forex, also known as foreign exchange or FX trading, is the conversion of one currency into another.
It is one of the most actively traded markets in the world, with an average daily trading volume of dollar5 trillion.
What is forex trading?
Forex, or foreign exchange, can be explained as a network of buyers and sellers, who transfer currency between each other at an agreed price.
It is the means by which individuals, companies and central banks convert one currency into another – if you have ever travelled abroad, then it is likely you have made a forex transaction.
While a lot of foreign exchange is done for practical purposes, the vast majority of currency conversion is undertaken with the aim of earning a profit.

The amount of currency converted every day can make price movements of some currencies extremely volatile.
It is this volatility that can make forex so attractive to traders: bringing about a greater chance of high profits, while also increasing the risk.
How do currency markets work?
Unlike shares or commodities, forex trading does not take place on exchanges but directly between two parties, in an over-the-counter (OTC) market.
The forex market is run by a global network of banks, spread across four major forex trading centres in different time zones: London, New York, Sydney and Tokyo.
Because there is no central location, you can trade forex 24 hours a day.

There are three different types of forex market:

Spot forex market: the physical exchange of a currency pair, which takes place at the exact point the trade is settled – ie ‘on the spot’ – or within a short period of time
Forward forex market: a contract is agreed to buy or sell a set amount of a currency at a specified price, to be settled at a set date in the future or within a range of future dates
Future forex market: a contract is agreed to buy or sell a set amount of a given currency at a set price and date in the future. Unlike forwards, a futures contract is legally binding
? Most traders speculating on forex prices will not plan to take delivery of the currency itself; instead they make exchange rate predictions to take advantage of price movements in the market.

What is a base and quote currency?
A base currency is the first currency listed 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 quoted in pairs – the price of a forex pair is how much one unit of the base currency is worth in the quote currency.
Each currency in the pair is listed as a three-letter code, which tends to be formed of two letters that stand for the region, and one standing for the currency itself.
For example, GBP/USD is a currency pair that involves buying the Great British pound and selling the US dollar.
How does forex trading work?
There are a variety of different ways that you can trade forex, but they all work the same way: by simultaneously buying one currency while selling another.
Traditionally, a lot of forex transactions have been made via a forex broker, but with the rise of online trading you can take advantage of forex price movements using derivatives like CFD trading.
CFDs are leveraged products, which enable you to open a position for a just a fraction of the full value of the trade.
Unlike non-leveraged products, you don’t take ownership of the asset, but take a position on whether you think the market will rise or fall in value.
Although leveraged products can magnify your profits, they can also magnify losses if the market moves against you.

Exchange rates tell you how much your currency is worth in a foreign currency. Think of it as the price being charged to purchase that currency.
Foreign exchange traders decide the exchange rate for most currencies. They trade the currencies 24 hours a day, seven days a week. As of 2016, this market trades dollar5.1 trillion a day.
Prices change constantly for the currencies that Americans are most likely to use. They include Mexican pesos, Canadian dollars, European euros, British pounds, and Japanese yen.
These countries use flexible exchange rates. The government and central bank don't actively intervene to keep the exchange rate fixed. Their policies can influence rates over the long term.
For most countries, the government can only influence, not regulate, exchange rates.
You must plan for exchange rate values when you travel overseas. When the U.S. dollar is strong, you can buy more foreign currency and enjoy a more affordable trip.
If the U.S. dollar is weak, your trip will cost more because you can't buy as much foreign currency. Since the exchange rate varies, you might find the cost of your trip has changed since you started planning it.
It's one of the ways ?exchange rates affect your personal finances.
You can Google the U.S. dollar to foreign currency exchange rate to get today's rate. It also shows a chart revealing whether the dollar is strengthening or weakening.
If it's strengthening, you can wait until right before your trip to buy your currency. Check to see if your credit card company charges conversion fees.
If not, then using your credit card overseas will get you the cheapest exchange rate. If the dollar is weakening, you might want to buy the foreign currency now rather than waiting until you travel.
Banks charge a higher exchange rate, but it might be cheaper than what you'll pay in the future. Here are the recent changes in the euro to dollar exchange rate.
Other currencies, like the Saudi Arabian riyal, rarely change. That's because those countries use fixed exchange rates that only change when the government says so.
These rates are usually pegged to the U.S. dollar. Their central banks have enough money in their foreign currency reserves to control how much their currency is worth.
To keep the exchange rate fixed, the central bank holds U.S. dollars. If the value of the local currency falls, the bank sells its dollars for local currency.
That reduces the supply in the marketplace, boosting its currency's value.
It also increases the supply of dollars, sending its value down. If demand for its currency rises, it does the opposite.
The Chinese yuan used to be a fixed currency. Now the government is slowly transitioning to a flexible exchange rate.
That means it changes less frequently than a flexible exchange rate, but more frequently than a fixed exchange rate. Here is the most recent yuan to dollar conversion rate.


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