If you're an active day trader, you may itch to continue trading when the markets close. In this case, forex might be right for you. Forex stands for foreign exchange and it describes trades carried out based on different interest rates between national currencies. Traders can also profit from fluctuations in exchange rates.

This article discusses the basics of forex trading and how active traders can use it to their advantage. Common traders having access to these trades is a relatively new thing.

In the past, forex trading was regulated primarily to larger institutions and individual traders with significant capital. With the emergence of the internet, common traders can implement this type of trading into their forex trading strategies.

What Is Forex?

The term forex stands for foreign exchange and the market has many abbreviations, including FX. However, when you boil these abbreviations down, foreign exchange simply entails trading foreign currencies from one to another.

The foreign exchange, or Forex market, is where traders trade currencies. These currencies enable the worldwide purchase of goods and services and they fluctuate depending on borders. International currencies conduct trade and business.

For example, if you live in the US and want to buy goods from a country in Europe that's a part of the European Union (EU), you have to pay for the goods in Euros. IN this case, the importer in the US has to exchange the equivalent value of dollars into euros.

Unique Aspects of Forex

The unique aspect is that there aren't any central marketplaces for foreign exchange. Traders conduct currency trading electronically, meaning transactions occur via computer. The market stays open 24 hours a day, compared to the stock market, which is only open during US business hours.

Currencies trade in all major world financial centers, including London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Sydney, and Paris, covering almost every timezone. When the trading stops in the US stock market, the forex market begins in Tokyo and Hong Kong. The accessibility bodes well for active traders looking to trade all day.

A Brief History of Forex

Technically, forex has been around for centuries. People have always bartered and exchanged across nationalities and locales. However, in the modern sense of the world, the forex market's formation is more recent.

After the Bretton Woods Accord in 1971, currencies exchanged more freely against one another. These currencies' values vary based on demand and circulation and foreign exchange trading services monitor them.

Most forex traders initiate from commercial and investment banks trading for their clients. However, active traders try to seize speculative opportunities by trading one currency against another.

How Do Traders Make a Profit On Forex?

There are two features to currencies that traders can profit from:

• You can earn money on interest rate differentials between two currencies.
• You can profit from fluctuations in exchange rates.

Traders profit from the difference between interests in two countries by buying currency with a higher interest rate and shorting the lower interest rate currency. For example, before the 2008 financial crisis, traders often shorted the Japanese yen and bought British pounds.

They did this because the interest rate difference was substantial. Interest trades are often referred to as "carry trade."

How Can Common Traders Trade Forex?

Before the dawn of the internet, trading forex was a challenge for traders. Multinational corporations, hedge funds, and high-net-worth individuals carried out most currency trades.

However, a retail market emerged with the emergence of the internet, and individual traders now have easy access to forex movement, either through banks or brokers tapping into a secondary market. Online brokers or dealers offer high leverage to traders who control an extensive trade with a small account balance.

Where Do You Trade Forex?

Forex trades on the FX market, the only continuous market in the world. The FX market consists of three separate markets, spot markets, forwards markets, and futures markets. The spot market is the largest of the three markets because it s the underlying asset that forwards and futures markets depend on.

How Does the Spot Market Work?

Traders buy currencies based on their prices in the spot market. Supply and demand determine their cost and several factors such as interest rates, economic performance, and investor sentiment influence the price.

Finalized deals in the spot market are known as "spot deals," bilateral transactions where one party delivers an agreed-upon currency to the counterparty and receives a specified amount of another currency at the agreed-upon exchange rate. At position close, they settle the trade in cash.

It's important to note that although the spot market is noted for dealing with transactions in the present, the trades take anywhere up to two days to complete.

Forwards and Futures Markets

Forward contracts are private agreements between two parties to buy currencies at future dates at agreed-upon rates. Futures contracts are standardized agreements between parties to accept a currency delivery at a future date and price.

The forwards and futures markets do not trade actual currencies. Instead, they make contracts that represent claims to specific currencies and a price per unit at a future date.

Conclusion- A Beginner's Guide to Forex Trading

Forex is quite a bit different from stock trading. The primary difference is that you can trade around the clock and the world. Price action is also more volatile, and with futures and forwards, you add even more speculation to the equation.

However, for active traders looking to maximize their gains throughout the day, forex trading is a perfect opportunity to double down on their bets. Until recently, with the help of the internet, forex trading was primarily reserved for larger institutions. With the emergence of a substantial retail market, traders can now take more advantage of the price fluctuations of foreign currency,

The novelty of this increased access entices many traders looking to increase their trading volume. Though, it should be noted that forex carries quite a bit of speculation with it.