Quite simply, it’s the global financial market that allows one to trade currencies.
If you think one currency will be stronger versus the other, and you end up correct, then you can make a profit.
If you’ve ever traveled to another country, you usually had to find a currency exchange booth at the airport, and then exchange the money you have in your wallet into the currency of the country you are visiting.
You go up to the counter and notice a screen displaying different exchange rates for different currencies.
An exchange rate is the relative price of two currencies from two different countries.
Or in forex trading terms, assuming you’re an American visiting Japan, you’ve sold dollars and bought yen.
Before you fly back home, you stop by the currency exchange booth to exchange the yen that you miraculously have remaining (Tokyo is expensive!) and notice the exchange rates have changed.
It’s these changes in the exchange rates that allow you to make money in the foreign exchange market.
What is forex?
The foreign exchange market, which is usually known as “forex” or “FX,” is the largest financial market in the world.
The FX market is a global, decentralized market where the world’s currencies change hands.
Due to the wide range of market participants, including central banks, financial institutions, corporations, hedge funds, and individual traders, exchange rates change by the second so the market is constantly in flux. Only a tiny percentage of currency transactions happen in the “real economy” involving international trade and tourism like the airport example above.
Instead, most of the currency transactions that occur in the global foreign exchange market are bought (and sold) for speculative reasons. Currency traders (also known as currency speculators) buy currencies hoping that they will be able to sell them at a higher price in the future.
Compared to the “measly” $20 billion per day volume of the New York Stock Exchange (NYSE), the foreign exchange market looks absolutely ginormous with its $7.5 TRILLION a day trade volume.
What are the trading hours for the forex market?
The foreign exchange market is open 24 hours a day, beginning Monday at 5:00am local Sydney time (Australian Eastern Standard Time) until Friday at 5:00pm Eastern Standard Time.
Global market convention for all currency pairs is that the value date of open spot positions rolls to the next business day at 5:00 pm Eastern Standard Time. The exception to this is New Zealand Dollar pairs, as those value dates roll forward at 7:00 am Auckland time from Monday to Friday.
All of this means that the local time of the value date rollover fluctuates throughout the year, depending on the currency pair, counterparty location, and daylight savings time conventions.
What are the different forex products to trade?
The following forex products are available to trade at Nexa Level X:
- FX spot (including precious metals)
- FX forwards and swaps
- FX options (vanilla)
If you’re not sure which forex product is right for you, let’s take a closer look to help you make the best choice for your goals.
- FX spot
The FX spot market is used for immediate currency trades. The term „spot“ refers to the settlement date of a foreign exchange transaction. For most currency pairs, this is two business days after the trade date (known as T + 2). At Nexa Level X, FX spot trades do not settle. Instead, open positions held at the end of a trading day are rolled forward to the next available business day.
- FX forwards
While the FX spot market is for immediate currency trades, the FX forward market is the market for trading currencies for delivery at some point in the future. It enables a trader to agree to a price today (the FX forward price) at which two currencies will be exchanged on a predetermined date in the future.
FX options give the buyer the right, but not the obligation, to trade currencies at a specified price on a specified date in the future. FX options can be used to express a view on the underlying market, whether as a directional play on a currency pair moving higher or lower, or as a speculation on future market volatility.
How does forex trading work?
Forex trading works like most transactions when you are buying one asset for another. The current price of a currency pair indicates how much of one currency is required to purchase one unit of another currency. The current price of currency pair X/Y will show you how much of currency Y it would take to purchase one unit of currency X.
In forex, currencies are abbreviated using ISO (International Organization for Standardization) codes. These are 3-letter codes and are used when denoting a currency pair. This allows traders to quickly identify the letters as part of what traders call a currency pair.
If a trader buys a currency pair, the expectation is that the price will rise, that the base currency is strengthening relative to the quoted currency. If a trader sells a currency pair, the expectation is that the price will fall, which would happen if the base currency weakens against the quoted currency.
It’s important to understand as much as you can about currency pairs if you want to successfully trade forex. So, let’s dig a little deeper into the most popular currency pairs you should get to know. Then we’ll help you learn more about how you can use these currency pairs to meet your goals.
