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What Is Forex Currency Trading?

Forex, as the name indicates, is the process of exchanging one currency for another. But when it comes to trading currency for profit rather than pleasure, the process is a little more complex.

🤔 Understanding the forex market

The forex market, where currencies are exchanged and traded for profit, is the largest market in the world by daily trading volume, making it one of the most liquid markets in the world. The market itself lacks a centralized venue for trades. The market is open 24 hours a day, five days a week – making it the only nonstop trading market in the world.

Moreover, thanks to the lack of a centralized marketplace, modern forex trades are conducted electronically OTC (over the counter) via a network of interbank trading terminals and computer networks.

While this provides speed and widespread access, it also means that the forex market is less transparent than other financial markets. OTC markets don’t require financial disclosures – and large liquidity pools from major institutional firms are a prevalent feature. (In fact, the motives of financial institutions trading forex often plays the most important role in determining currency prices.)

What is currency?

Currency, in its base form, is a crucial element of any economy, as it’s what allows individuals to purchase goods and services, both locally and across borders. Currency exchanges facilitate this process – not just for travelers on holiday to Canada, but for international businesses seeking foreign trade, and the investors hoping to make a fast buck.

The value of each individual currency varies based on factors such as:

  • Demand
  • Circulation
  • Interest rates
  • Economic strength
  • Geopolitical events
  • Forex market activity

When you trade currency on the foreign exchange market, you always trade in pairs. There are four types of currency pairs of which to be aware in the forex market:

  • The major pairs include the currencies that comprise most global forex trading, including EUR/USD, USD/JPY, and USD/CHF.
  • The minor pairs are less frequently traded, but usually feature major currencies against each other (instead of the USD) such as EUR/GBP or NZD/JPY.
  • Exotic pairs pit a major currency against smaller or emerging economies, such as GBP/ZAR, USD/THB, or JPY/NOK.
  • Regional pairs are classified by regions, such as Australasia or Scandinavia, including EUR/NOK, AUD/NZD, or NZD/SGD.

What is forex currency trading?

Forex pairs are traded in lots, with the size of the lot dictating the type of forex account.

  • A standard forex account trades up to $100,000 in one lot
  • Mini forex accounts trade up to $10,000 in a single lot
  • Micro forex accounts let you trade up to $1,000 in one lot

Prior to the internet, currency trading was mostly conducted by large hedge funds, multinational corporations, and commercial and investment banks who could front the capital required.

And while commercial and investment banks still make up the majority of forex trades today, the proliferation of the internet – and secondary market brokers willing to front massive leverage to their clients – means that individual and professional investors can seek their fortunes in the currency markets, too.

In fact, it’s not uncommon for a broker to allow leverage up to $1 for every $100 traded. In other words, a $10 investment can net an investor a micro lot up to $1,000 worth of currency. And while this can enhance an investor’s gains, it also enhances losses indiscriminately.

What this means for you

The forex market provides a way for investors to profit off the fluctuations in foreign currency exchange rates. In fact, the word itself is an amalgam of “foreign” and “exchange.”

But how do investors make their fortunes (or not) in the forex market? It all comes down to two distinct features that make forex an attractive asset class:

  • The ability to profit directly from changes in the exchange rate
  • The ability to capitalize on the interest rate differential between two currencies by buying the currency with the higher rate and shorting the currency with the lower rate (sometimes known as a carry trade)

There are a few ways to trade forex:

  • On the Spot Market
  • On futures
  • On Forward Markets
Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

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