Foreign exchange trading, also called forex trading in short or currency trading is a decentralized digital system of trading currencies. It involves largely the rigorous processes of speculating (predicting), buying and selling of currencies. Forex trading takes place five days in a week.
Just like cryptocurrencies, forex trading basically entails selling a currency when you perceive the price will go down in the future and buying it when you speculate its worth will increase in the future. This process accounts for the constant fluctuation prevalent in the forex trading phenomena. Trading of currencies is influenced by the exchange rate at the time. This means that the worth of one currency in another currency at the time of transaction influences the exchange rate. For instance, the worth of one Dollar in Naira this month will determine the exchange rate of Dollar against naira this month.
Basic Terms In Forex Trade You Must Know
Exchange Rate
Exchange rate in a more simple term is the worth of a country’s currency in terms of another country’s
currency. For example the worth of one Naira in terms of Dollar i.e (367 naira - 1 dollar). This simply means that you trade a currency for how much it amounts in another foreign currency.
Base Currency
Trading forex involves two currencies at a time. The first currency to the left is called the base currency. The base currency automatically assumes the place of the higher currency and takes the lead in the trade.The base currency is used to buy the lower currency which is usually positioned to the right.
Quote Currency or Counter Currency
The second currency positioned to the right is called the quote or counter currency. It represents the lower in most cases. It is used to sell the base currency which is actually higher in worth.
(Base-Counter Currencies)
Bid Price
The bid price is the amount of the lower currency (quote currency) needed to buy a unit of the base
currency (the first or higher currency). Bringing it home now, it means how much of the Nigerian Naira
needed to purchase One US Dollar. For instance, if theUSD is the base price and the Nigerian Naira is the
quote price ($1 = #367). The base price is $1 while the quote price is #367. Therefore, #367 is the bid
price of $1.
How Does Forex Trading work?
One currency is placed against the other usually two unequal currencies; a higher and a lower currency respectively. On the other hand two prices are quoted on the trade box. One is the buy price the other is the sell price. This explains the fact that one currency is worth the other. Obviously the first currency to the left takes the lead and automatically assumes the higher currency. The majorly traded currencies are the Euro and the US dollars. This is because they are largely acceptable in the international stock exchange and earn an impressive global acceptability as well.
The abbreviation for each currency is determined by the International Standard Organization or International Organization for Standardization, which ever you choose to call it. They follow a specific algorithm for crafting acronyms for currencies. So also is the worth of a currency is determined by such factors as a currency’s purchasing power in the international stock exchange, the interest rate, the terms of trade (the export and import prices) and lot more.
WHAT IS THE LOGIC IN FOREX TRADING
The system of the forex trade runs in such manner that you are buying and selling the two currencies simultaneously. That means for instance that if you are trading Euro against dollar i.e EUR/ USD, you are buying EUR and selling USD at once. There are chances that the base currency, which is the EUR, will gain as against the quote currency, which is USD. It is also possible that EUR will loss against the USD.
(Clash Of The Titans)
Generally, the depth of trading forex is much understood in the process of trading. Just like trading crypto and any other business, the actual knowledge lies in the practice. There are a number links to forex trading demo that affords you with over $100,000 virtual currency to practice with until you can open a real trading account.
N/B:One more thing you must know is, in trading you must learn to invest as much amount as you can afford to loose.
The fluctuations in currencies account for a good percentage of the losses. Sometimes countries deliberately bring down their exchange rate to attract investors who often fall prey to the subsequent change in the exchange rate.
I hope you learnt something new from this piece
REFERENCES
1,2,3
