What is Forex Trading or Currency Trading?
As we know Forex means Foreign Exchange. It is also known as currency trading. This is the means of converting other country’s currency to the local currency or vice versa. Now Forex Trading is driven majorly by two intentions. One is solely for commercial purpose and second is the retail trade or speculation trade.
Commercial Forex Trading
This is done solely because of global economic reasons. This type generally denotes the international financial transactions. Country to country trade takes place throughout the day. Most of the countries have some economic relationship with each other. And as the entire earth doesn’t take rest at the same time, the Currency Trading between countries continues throughout the day and night. Some examples of commercial trading are payment for imported goods, taking or paying overseas loans, and buying goods or services abroad etc. Commercial Forex Trading accounts for 95% of the trading done in an entire day.
Retail Forex Trading
This is the most common type of Forex trading or currency what we do as an individual trader. It is also called speculation trading. This type of trading is done solely with an aim to earn money. Traders generally speculate or assume the price movement of currency rates and plans for buying or selling currencies in a strategic way. For example, if you think the USD is going to rise against the JPY, you can buy the USD/JPY currency pair in a low exchange rate and then sell it at a higher price (If market favors) to make a profit. But if you buy the JPY against the USD (or Selling USD/JPY), and the USD strengthens, you will then be in a losing position. So, it’s important to be conscious about the risk involved in trading Forex and take decisions with utmost care.
[See Also: How to select the right forex broker?]
Types of Forex Trading Market
Forex Trading Market or Currency Market, depending upon the nature of trading practice, can be categorized into three major types:
Spot Market: Spot Market is the largest marketplace for trading Forex. The spot market is where the currencies are bought and sold at the current market rate. In general, when we talk about Forex trading or currency trading, we mostly talk about spot market. Here the price is decided according to the demand or supply of the currency in question. In the spot market, the real currencies are traded, and when a deal is finalized it is called a "spot deal". Although the definition of spot market doesn’t tell about any Lot Size for a transaction, in reality, the deals are made in Lots.
Forward Market: In the forward-market, the real currencies are not sold, instead contracts are bought and sold over-the-counter (OTC) between two parties. And terms and contracts are determined by those parties only. One variety of this market is Forex Binary Options Trading (It is different from Options trading of the stock market).
Future Market: The Forex future market is where future contracts are bought or sold, to exchange a specified amount of currency at a predetermined price, at a set date in the future. In the futures market, futures contracts are done based upon standard Lots size. The future market is very similar to the forward market, except that all futures contracts are legal contracts and contain a specific termination date, at which point the currency must be exchanged. At present, many traders use futures contracts as a means of minimizing the market risks, such as to hedge their open positions in stop market.
For more details see our guide on Four Different Ways to Trade Forex.
Why Trade Forex or Currency?
There are several reasons to get involved in Forex trading, but the answer to the above question as follows:
Simplicity: You can trade Forex just by learning technical analysis and practicing it.
Liquid Market: Backed by a larger volume of daily trades, it is the most liquid market in the world. That means that under normal market conditions you can buy and sell currency as and when needed.
24 Hour Open Market: As because the whole world does not sleep at the same time, so does the Forex market. It is open 24 hours a day, so you can trade in Forex market any time of the day you want. [Suggested: How Does the Forex Market Trade 24 Hours a Day?]
The Market cannot be cornered: The enormous size of the Forex market also makes sure that no one can corner the market. Even larger banks as a single entity can’t detain the market for a long period of time. (Caution: Beware of the fraud brokers or Forex scams, which are very common).
Focused market: Unlike Stock Market, which lists thousands of stocks to choose from, the Forex market is only having more or less 10 Major currency pairs and some minor currency pairs. This makes you more focused on a limited number of choices.