How Does Forex Trading Work?

Business May 23, 2020

Forex Trading, Crypto, etc.

So... How Does Forex Trading Work?

Forex trading, crypto, etc. What is forex trading? how does it work?
What is forex trading? how does it work?

Foreign exchange service has been here for many years. In the past, people needed the service when they travelled to other countries. The foreign exchange involves changing one country’s currency for another. This could be done at a bank or a foreign exchange broker. That is why forex exchange broker was commonly found near to the tourist center. Now, foreign exchange (forex) has been brought into trading activities, called forex trading.  Just like any other trading activities, it aims at obtaining profits.

For many people, forex trading is a source of income. How does it work? Just like trading stocks, forex traders make profit by selling the currency higher than the purchase price. If course, speculation is not enough for forex trading. There must be some tricks and strategies to read the market trend and to decide when to buy and when to sell the currency.

How Does Forex Trading Work? The Basics

Forex trading, crypto, etc. What is forex trading? how does it work?
Forex trading, crypto, etc. What is forex trading? how does it work?

Forex is very actively traded. Trillions of dollars are changing hand every trading day. The trading activity does not need a trading exchange, just like it does for stock trading. However, forex trading cannot happen in a peer-to-peer way as it can with crypto trading. Instead, trading activities is facilitated by over the counter market. The following are some ways how forex trading works:

  • There must be a central exchange. This is not like the stock exchange regulated by the government in every country. The central exchange maintains the centralized market, in which the currency exchange happens. Everything is processed here. Some forex traders called the central exchange as forex trading platform. The centralized markets work by tracking the amount and volume of orders at a given time and providing more accurate analytic data of all the transactions.
  • The Forex market is open 24 hours a day. Just like the crypto trading, trading at the centralized forex market is virtually free of the regulators’ influence. Here, the traders compete each others to gain profits and use their own strategies to execute the transactions. In addition, the forex market is available 24 hours a day, thanks to the different time zones across the world. Actually, the central exchange is only open at work hours. However, once a central exchange is closed, another one may be open at different time zone.
  • There must be currency pair. Forex trading means exchanging a country’s currency to another. It means that the trade involves a relationship between two currencies, which is called currency pair. Each currency pair is designated with standard letters. For instance, US Dollar is coded with USD, GDP for British Pound, JPY for Japanese Yen, and so on. Then, the currency pairs are stated in a combination like EUR/USD for combination of Euro and US Dollar. The forex traders must be familiar with these designations.

So, how do the forex traders earn profit? The profit is determined by the spread. Spread in forex trading is the difference between purchases and sell price. The difference is usually expressed in pips. In fact, the spreads are usually very tight. For forex traders, even small spreads are meaningful, particularly for higher volume of transactions.


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