What is Forex Trading? | The bank rate

Forex trading, or foreign exchange, involves exchanging one currency for another. There may be functional reasons for engaging in forex trading, such as traveling overseas and needing to exchange dollars for the currency of the country you are traveling to, but there may also be financial reasons. or speculative to trade currencies.

Here is some key information about forex trading, its history and trading strategies.

Key statistics of forex trading

  • The average daily currency volume in North America in April 2021 was $ 966.7 billion, according to a New York Fed survey.
  • This showed an increase of almost 20% from April 2019 levels of $ 810.9 billion.
  • The average daily forex trading volume was $ 6.6 trillion in April 2019, according to a triennial report by the Bank for International Settlements (BIS).
  • The US dollar is by far the most popular currency in forex trading, accounting for $ 5.8 trillion in average daily volume as of April 2019, according to the BIS.
  • The second most popular currencies were the $ 2.1 trillion euro and the $ 1.1 trillion Japanese yen, according to the BIS report.

What is forex trading?

Foreign exchange markets can be used to exchange one currency for another, and this may be necessary for several reasons. Companies that operate in more than one country, financial traders, and people looking to travel abroad all have reasons to engage in forex trading.

Due to the vast need for foreign currencies, the forex markets tend to be the largest and most liquid in the world, but some currencies can be volatile.

The history of forex trading

Currency trading has been around in one way or another for centuries. People have long needed a way to pay for goods and services, and different currencies have played a major role. But today’s more modern forex markets are a relatively recent creation.

  • In July 1944, representatives from 44 countries gathered in Bretton Woods, New Hampshire to establish a monetary system that would create stable exchange rates, prevent competitive currency devaluations, and promote economic growth.
  • The Bretton Woods system became fully operational in 1958, with currencies convertible, international debts settled in dollars, and dollars convertible into gold at a fixed exchange rate.
  • In 1971, US President Richard Nixon ended the convertibility of the dollar into gold after the amount of US dollars held abroad exceeded the US gold supply.
  • After the collapse of the Bretton Woods system, countries were free to choose any arrangement for exchanging their currency except pegging it to gold. Currencies can be tied to another currency, a basket of currencies, or be determined exclusively by market forces.
  • Today, forex trading is primarily done by banks on behalf of clients, and trading takes place 24 hours a day from 5:00 p.m. ET on Sunday to 4:00 p.m. ET on Friday. Individuals can even trade using an app on their phone.

The biggest forex trading centers

Most currency trading takes place in London, followed by New York, Singapore and Hong Kong. Some believed that the UK’s decision to leave the European Union would hurt London’s place as the biggest foreign exchange market, but that did not turn out to be the case.

1 UK 3,576,409 43.1 percent
2 United States 1,370,119 16.5 percent
3 Singapore 639,869 7.7 percent
4 Hong Kong 632 108 7.6 percent
5 Japan 375,505 4.5 percent
6 Switzerland 275,719 3.3 percent
7 France 167 123 2.0 percent
8 China 136 017 1.6 percent
9 Germany 124,448 1.5 percent

Source: BIS Triennial Survey of Central Banks 2019. Average daily dollar volume in all other countries is $ 1,003,271 million, or 12.1% of total market share on a net-gross basis. .

Forex trading strategies

Forex trading is quite simple in concept, but that doesn’t mean that you will make money trading currencies. If you are just starting out, make sure you exercise caution and understand the trades you place and how they can go wrong.

You can trade forex with many of the same brokers online that offer stock trading. Here are some strategies for beginners and more experienced traders.

  • Beginners: Many traders use technical analysis to plan their next moves, which involves looking at charts and price action to try and anticipate a currency’s next direction. Trend trading is a strategy that is suitable for beginners as it is fairly straightforward to understand and is basically a prediction that recent price trends will continue.
  • Intermediate: If you are looking for a slightly more advanced approach, a carry trade can be a profitable option. A carry trade involves shorting a currency with low interest rates and buying a currency that pays higher rates. The Japanese yen is often used in this strategy due to the low interest rates in Japan. The trader then buys a different currency to capture the rate difference. But beware, exchange rates can move so that the interest rate gain is wiped out.

How to get started with forex trading

Forex trading has similarities to other investment options, but there are a few things that make it unique.

  1. Open a brokerage account. Before trading a financial asset, you will need to create a brokerage account, which is easy to do online through sites like Interactive Brokers or TD Ameritrade. Not all brokers offer forex trading, so be sure to verify that a platform does before opening an account. Funding the account is fairly straightforward and can be done by wire transfer or physical check. Funding the online account usually takes a few days.
  2. Learn the basics of forex. Forex trading presents some unique challenges that you might not be familiar with if you’ve only traded stocks or ETFs. The variables that determine forex trading and changes in exchange rates are different from those that determine stock prices. You will likely need to pay more attention to the macroeconomic factors of the countries whose currencies you trade. Things like GDP growth, trade deficits, and interest rates can play an important role in exchange rates. Make sure you understand the basics before you start trading.
  3. Choose a strategy. Once you have mastered the basics, choose the trading strategy you want to pursue. Will you use technical analysis to identify trends or will you take a more fundamental approach based on macroeconomic data? Both approaches can be successful, but it’s important to choose the strategy that’s right for you.
  4. Start slowly. It is best to take it slow when you are starting out. No need to aim for the moon with your first exchanges. Start with small amounts as you learn so mistakes don’t overwhelm you. As you gain more experience, you will be able to increase position sizes and recognize trends faster.

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