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Introduction to Foreign Exchange Trading: Understanding the Basics
FOREIGN EXCHANGE
Introduction to Foreign Exchange Trading: Understanding the Basics
February 17, 2025
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1 minutes
The foreign exchange market involves trading currency pairs in a highly liquid, global 24-hour market shaped by economic, political, and financial factors.
Foreign exchange, also known as forex or FX trading, is the global marketplace for buying and selling currencies. The forex market is the largest financial market in the world, with a daily trading volume exceeding $6 trillion.
Unlike other financial markets, forex operates 24 hours a day, five days a week, across different time zones, making it an accessible market for both institutional investors and individual traders.
What is Forex Trading?
Forex trading involves the simultaneous buying of one currency and selling of another. These transactions are always quoted in currency pairs, such as EUR/USD (Euro/US Dollar) or GBP/JPY (British Pound/Japanese Yen). The first currency in the pair is the base currency, while the second currency is the quote currency. Traders aim to profit from the fluctuations in the exchange rates between these two currencies.
Key Factors Driving Forex Market Movements
Several factors influence currency prices in the forex market. These include:
Economic Indicators:
Economic data such as GDP growth, employment numbers, and inflation impact currency value. A strong economy typically leads to a stronger currency.
Interest Rates:
Central banks influence currency values through interest rate policies. Higher interest rates tend to attract foreign investors, increasing demand for the currency.
Geopolitical Events:
Political instability, elections, or major geopolitical events can cause volatility in the forex market as traders react to the uncertainty they bring.
Market Sentiment:
Forex is heavily driven by sentiment, including trader psychology and market speculation. News, rumours, and global events can quickly change the mood of the market.
Read also: Forex Market Impact: How Global Events Affect Forex Volatility
Conclusion
For those who are keen to try out forex trading, it is essential to understand how the market works, what influences currency values, and the various tools available to analyze market movements. With its high liquidity and global access, Forex trading offers unique opportunities and risks. Success in forex trading requires a combination of knowledge, risk management, and strategy.
Written and edited by the Straits Financial Group Content Team
DISCLAIMER: This document is issued for information purposes only. This document is not intended, and should not under any circumstances to be construed as an offer or solicitation to buy or sell, nor financial advice or recommendation in relation to any capital market product. All the information contained herein is based on publicly available information and has been obtained from sources that Straits Financial believes to be reliable and correct at the time of publishing this document.
Straits Financial will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Past performance or historical record of futures contracts, derivatives contracts, and commodities is not indicative of the future performance. The information in this document is subject to change without notice.
Please also refer to our important notices at https://www.straitsfinancial.com/important-notices-and-disclaimer.
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