You probably have heard about forex trading and the currency market. Nowadays, there are many millionaires sharing stories about how they made fortunes in the financial market – specifically trading currency. Not too long ago, information about forex trading was only accessible by newspapers. Today though, market information spread via online platforms that have come to dominate the mass media. Aside from that, forex trading itself is now a digital affair. Mobile apps, software programs, and other tools have made it possible for all people to access the market. This market is also now a 24/7 affair thanks to technology.
If you are looking to get into trading, there are various things you will need to know. The following is a quick look at what forex trading is and what it involves.
The forex market explained
The question a lot of people who are not familiar with the forex market ask is – how does forex work? The answer is simple. Traders buy and sell currencies to those who need it. The process itself is not that straightforward though as there are various parties involved in the buying and selling. In the market, you will encounter brokers mediate the trade between institutions and traders. There are also market forces that influence which currencies are popular at a given time. Overall, the currency is like any other commodity that is influenced by forces of demand and supply.
What qualifications are needed to trade?
When it comes to the qualifications needed to trade, no stringent rules dictate who can trade and who cannot. Anyone with a little cash can get into forex trading. When it comes to qualities though, various skills, including trading computer, are needed to succeed. The forex market is quite volatile and successful traders must be good managers. You must be able to handle pressure and also be skilled enough to apply the right decisions when necessary. A good combination of forex risk management skills and experience is thus needed to succeed.
Which items are mainly traded?
As stated earlier, the forex market is all about exchanging currencies for a profit. Every currency in the world can be traded for a profit. Some currencies are more valuable than others though. The two main markets that have the highest volumes of trade are the European, Asian and American markets. These markets are open at different times during the day. In terms of the actual trade, traders can only exchange currency in pairs. This is because the trade of one currency is always tied to another. The seven major pairs involved in the forex market are EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, and AUD/USD.
Factors that influence the forex market
The forex market does not work in isolation and many forces or factors that influence it. These forces are the main causes of the discrepancies that forex traders need to make a profit. Some of these factors are local while others are international. The main factors that influence the forex market can be generally categorized as:
- Economic and political
- Market-related factors
Economic and political factors are all issues that relate to the macroeconomic and microeconomic realms. The institutions, entities, and individuals in these realms have a huge effect on the market. Banks and decision-makers in the economy affect how currencies are perceived. Investors also affect the movement of currency and they are part of the equation.
When it comes to market factors, news reports and the general sentiments of investors are key factors. The way different entities react to news and reports dictates how currencies are traded.
The difference between the forex market and other financial markets
There are many kinds of financial markets and forex trading is just one of them. All financial markets that allow investors to do trades are similar in many ways. The difference though comes when you consider the commodities or items being traded. For the forex market, currencies are the only items that are traded. In the stock market, shares of companies are the main items of trade. The commodities market is made up of actual valuable goods while the CFD market is defined by contracts trading. For traders though, all these markets present an opportunity to make a profit.