If you’re not familiar with what forex trading is all about, we’ve got the guide to get you started:
What is Forex Trading?
Forex trading is how currencies are converted into each other. The enormous amounts being exchanged every day impact the value of currencies, causing some currencies to increase in value and others to decrease sharply. Traders use tools such as forex forecast indicators and forex prediction sites to earn a profit from forex trades.
The chances are you have already participated in this market without even using forex trading platforms. If you’ve ever been on vacation abroad, where you converted and then spent any amount in the local currency, you performed a forex trade on a small scale.
A pair of currencies is always required for an exchange, which is why the first currency in a forex trade is called the ‘base currency’ and the second is called ‘quote currency’. The price of a forex pair indicates the value of one unit of the base currency in the quote currency.
What are Currency Markets? How Do They Work?
There are three kinds of forex markets. While traders in all of them rely on forex prediction formulas, the difference between them is in how the trades are conducted.
- Spot forex market: In a spot forex market, the trades involve the physical exchange of two currencies. This exchange is done as soon as the trade is decided or, in other words, on the ‘spot’, which is how the market gets its name. However, exchanges may also be carried out within a short time of the trade being agreed upon.
- Forward forex market: Two parties set up a contract to either buy or sell a particular amount of currency at a predetermined price. The contract may be executed at a specific future date, or at any date chosen from a range of future dates. This contract isn’t legally binding.
- Future forex market: Here, the contract explicitly specifies the amount of currency, the price as well as the future date on which the currency will be bought or sold. Due to this specificity, a future forex contract is legally binding.
Forex vs Stocks
The primary difference between forex trading and other markets such as stocks is what is being traded. Trading hours are another major difference.
Currencies are bought and sold in forex markets. These are short-term investments, have a higher risk involved and, accordingly, a higher profit too. Since the forex market is completely decentralized, there are no fixed hours. You can trade through forex trading sites round the clock, five days a week.
Stocks represent ownership in publicly listed companies and can be purchased or sold in stock markets. The risk and profitability of stocks are both high, but trading can only be done within the operating hours of the stock exchange.
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