What is trading FOREX (Foreign Exchange)?
Forex plays an important role in global financial markets. with rotation 5 billion dollars a dayThe foreign exchange market is the largest financial market ever. But what is the change? In general, foreign exchange is a foreign currency. For example, if investors want to buy US government bonds, they must first exchange the euro for US dollars. But the same currencies can also be exchanged. The following guide is an introduction to the topic and explains the important mechanics of forex trading.
What is trading: the history of forex
We will not go over the full history of the money market or currency in this article. No doubt many of you have a file hands-on mentality And you want to dive straight into the interesting aspects of the forex world. In order to get an idea of the story, the most important events are listed below.
The first coins were circulated around 1000 BC. It was found in distant China. These coins were mainly made of all kinds of metals such as copper, lead, and iron. They often also had hollow interiors so that they could be easily assembled on a stick or rope.
The gold standard was introduced around 1880. The participating countries agreed to peg the value of their currency to the value of gold. This situation was no longer possible with the outbreak of World War I and the US dollar became the main currency of international trade. To date, the US dollar is considered the most important currency. The regime could not survive, because the governments needed a lot of money to finance the war and reconstruction.
Bretton Woods was central to the creation of the International Monetary Fund and the World Bank. It is a cooperation agreement between 44 participating countries. A fixed exchange rate has been set between the different currencies. However, small fluctuations of about 1 percent were allowed. The Bretton Woods Agreement was completely dissolved in 1971.
In fact, the 1958 Treaty of Rome decided to improve the economic activity of neighboring countries. The ambition was to build a “federation” across countries. All this resulted in the European Union as we know it today.
What is forex trading?
What is trading? Even small investors can trade currencies. However, it is extremely rare for a foreign currency to be physically acquired. On the contrary, in forex trading, the right to a particular currency is bought, but the currencies do not actually change. Forex is traded through the so-called financial derivatives. Options are used in particular here. In simple terms, the value of these derivative financial instruments changes according to the value of the currency pair in question. Financial products just simplify forex trading, as no actual currency conversion is required. Many of these financial derivatives have a Positive effect. This allows traders to move more money through the financial markets than they actually use. This is partly done through regular online brokers, but there are also forex brokers that specialize in forex trading.
It seems confusing at first glance, but forex trading is quickly explained with the help of a small working example:
a coin dealer The dollar is expected to appreciate against the euro. The current exchange rate is 1: 1. The forex trader invests a total of 1,000 euros through his broker. This is exactly where the leverage mechanism comes in. Let’s say the leverage is 1:10. Then the trader actively moves 10,000 euros in the financial markets. This is achieved through the broker who acts as an intermediary. The market is developing as expected by the trader. He closes his position i.e. sells the dollar at a price of 1 euro for 0.9 dollars. The trader will now get €1,111.11 for the $1,000 he already had, resulting in a profit of €111.11. Nevertheless, the trader actively moves 10,000 euros in the financial markets. This results in a profit of €1,111.11, which is ten times the gain that would have been achieved without the leverage.
The most important currencies at a glance
Currencies of large economic regions or important financial centers are often traded in international markets. Groups of these are also called “specialties”. The most commonly traded currencies in forex trading (forex trading / currency trading) are:
- American dollar
- Sterling pound
- Japanese Yen
- Swiss Franc
Conclusion: Forex trading is trading in foreign currencies (Forex)
Foreign exchange is a mixture of different currencies. These currency pairs can be traded daily on the exchange. However, foreign currency is not obtained physically. Currencies (forex trading) are traded almost entirely through financial derivatives. If you want to trade forex, all you need is a joint deposit with a broker. Professionals can also conduct forex trades through professional forex brokers who specialize in these types of trades.