Forex trading (also ‘Foreign exchange’ or ‘FX’) is the buying and selling of one currency for another. Trades are placed based on the exchange rate listed on over the counter (OTC) or exchange traded platforms.
The market is the largest in the world, seeing over $5 trillion of trading each day . Forex can be traded five days a week, around the clock. There is no central exchange for currencies, so they are traded across the globe a various sources.
In each currency pair, the first currency listed is the ‘base’ currency, and the second the buying currency. So with EUR/USD the price quoted will be how many US dollars are required to purchase 1 Euro.
Almost all financial news, or global events, will influence forex prices. With markets available 24 hours a day and many brokers offering low commission, tight spreads and high leverage, forex trading has become extremely popular with retail investors. It remains however, high risk, particularly where leverage is involved.
Forex pairs are the starting point for forex trading. A ‘pair’ is the two currencies that are going to be traded. So a trader is going to buy one currency, using the other. So for example, with the GBP/USD pair. The trader will buy pounds, using the US dollar.
When prices are quoted, they are always the second currency, buying the first. So with EUR/GBP for example, the price quoted is the cost in pounds, to buy 1 Euro. Note however, that the decimal will move, making the price look a little strange to anyone used to exchanging currency for their holiday. In the EUR/GBP example, the rate for trading is currently 8454.8. For holiday makers heading to Europe, that equates to 84.5 pence buying 1 Euro.
The currency of the trading account does not matter, the broker will convert them as required in order to allow traders to buy or sell currencies. Retail forex trading is simply speculating on the movement of the exchange rates between forex pairs.
Established pairs, traded in high volume and based on the US dollar, are known as the ‘major’ pairs. In addition to these more traditional forex pairs, there is fast becoming a much broader range of currencies to trade – these are referred to as ‘minor’ or ‘exotic’ pairs. Binary options brokers are now offering options on between 40 and 50 different currency pairs from all over the globe. Emerging markets have added a whole new element to Forex trading. These markets include regions like South America and Asia. Currencies often represent the market confidence in the entire economy of the area concerned. Given the huge range of factors that contribute to such economies, it is easy to see why prices fluctuate constantly.
Minor and exotic pairs do however, see lower levels of trading volume, which can impact volatility, but also availability at times.
So what influences the FX markets? Pretty much everything. Almost every piece of global news could have a conceivable impact on currency prices. For example, the collapse in the price of oil led to a similar fall in the value of the Russian rouble. An economy so heavily linked with oil will rise or fall with the value of that commodity. There are additional factors to consider of course, but the example is clear.
A more subtle example was the Indian rupee. New governorship at the Reserve Bank of India boosted investor confidence in the recovery plans set out for the Indian currency. That confidence was reflected in the resulting strong performance of the rupee. While India’s currency benefited directly, other Asian currencies drifted upwards as well, with regional performance a factor which helped both the Philippine peso and Thai baht.
Another example is foreign policy. If a nation such as China were to broker a deal with Russia over gas, both currencies may benefit. If markets believed one trade partner has the better side of the deal then one currency may gain while another suffers. Traders may take a view on future foreign policy and invest accordingly. These examples are some of the more obvious and larger market drivers, but illustrate the fact that forex is a very complex market.
Uncertainty in markets usually leads to volatility. The global economy is without doubt uncertain right now, meaning there are plenty of opportunities for Forex traders. Binary options provide an opportunity to profit from the uncertainty. The range of forex currencies available to trade via binary options brokers has never been bigger and the right strategy, for the right currency, could prove very profitable. Our reviews highlight those brokers that focus on exchange rate binary options.