What do you mean by forex trading
Definition: what are foreign currencies?
Foreign currencies are assets in a foreign currency or Securitieswhose value is in such a foreign currency. By the way, banknotes or coins only count as foreign currencies if they are on one Foreign currency account have been paid. These are among the most traded currencies Pound Sterling, the japanese yen, the US dollars, the franc as well as the Euro.
Which means of payment count as foreign exchange?
- Balance in a foreign bank account
- Travelers checks
- Receivable in foreign currency
- Letters of credit
What is the exchange rate of a currency?
While in the financial language regularly from Exchange rate The term is used to describe many more Exchange rate to introduce. An example makes it clear what is hidden behind the exchange rate or exchange rate of a currency.
Mr. Müller doesn't want to spend his annual vacation at home, but dreams of a trip through the USA.
In the meantime, he changes € 3,000 into $ 3,300 - so it is an exchange rate in another currency of 1.1. Since the $ 3,300 is not his only supply of money, but only serves as an outermost reserve, that money will ultimately remain untouched until the end of his journey.
When Mr. Müller exchanged the $ 3,300 back into euros at the end of his vacation, the value of his money increased due to the favorable course of the exchange rate. Instead of € 3,000, he now gets € 3,036 exchanged. The exchange rate from US dollars to euros was 0.92 in this example. Mr. Müller is unwanted in this way Forex Trader become.
The exchange rate of a currency shows the ratio of one currency in terms of the other currency. In the last example with Mr. Miller, $ 1 corresponds to the value of € 0.92.
Why does the exchange rate of a currency change?
When and at what speed exchange rates will change is not easy to predict. If an exchange rate has changed quite rapidly, for example Speculation be the reason for it. An exchange rate can also change quickly, if important decisions in politics that have European or global consequences.
When it comes to investors, however, to determine in which direction a foreign exchange rate is likely to head over a longer period of time, it usually depends on the overall economic situation together. Are the citizens optimistic about the future or are they more skeptical? Are companies in Investment mood or rather cautious?
The savings rate, unemployment figures or GDP also provide information about the assessment of the economic strength of an economic area. Many circumstances can influence the exchange rate to a greater or lesser extent - whether for a specific moment or permanently. Investors are therefore able to foresee developments precisely.
The function of foreign exchange
Countries and companies cannot do without foreign currency in any way. Without foreign currencies, for example, no German company would be able to set up a branch outside of Europe. Anyone who wants to invest in the USA cannot do without the American dollar.
Without the right oneMeans of payment for example, no costs for the new building could be paid. Employees also have to be paid - and only in the currency of the relevant country, such as the USA in this case. The same applies to the procurement of materials.
The US dollar is a kind of world currency and thus has a special position in the field of foreign exchange. For example, oil is traded in US dollars. Even in the event that trade takes place between two countries that are not from the USA.
What is interbank trading?
It happens all over the world Foreign exchange transactions between banks. One then speaks of interbank trading. The subject of the business can besides foreign exchange alsoPrecious metals, Derivatives, shares or Securities be. First and foremost, the banks want to be involved in the area of interest and to make a profit from it.
Foreign exchange trading is ideal for this. Due to the exchange rate differences between the individual currencies, buying and then reselling a certain currency enables a possible return.
History of Forex Trading
The foreign exchange deals have theirs Beginnings inancient Greece. Dealers from the Middle East came together there as well as dealers from many European countries. As each country had its own currency, a solution to fair trade had to be found. At that time the so-called money changers played an important role. They exchanged the coins of different cities and countries and put the respective weight and gold ratio in relation.
The 16th century finally calls the Medici family on the plan. This produces a book. The content is an extensive list of domestic and international means of payment. The corresponding exchange values were given. In 1880 it was finally possible to have your own account in another country and use it for corresponding payments.
The so-called Bretton Woods Agreement 1944 ensured that exchange rates were formed around the world. The handling of corresponding fluctuations in exchange rates was also specified. Central banks were given the task of intervening in foreign exchange trading if there were any developments. In 1969 the rigid exchange rates finally eased.
In 1973 there were large price fluctuations, especially the Oil crisis was owed. It became clear that risk management is essential in forex trading. In 1982 Mexico shut down its foreign exchange market. The countries in Latin America in particular suffered from this. That followed later Tiger State Crisis (1997). In 1998 the Argentina crisis was triggered. The importance of political developments on foreign exchange trading became clear from these examples.
How does currency trading work?
Unlike in stock trading, there is currency trading or foreign exchange transactions no central point like the Deutsche Börse in Frankfurt. Rather, forex trading consists of a loose network of banks and brokers that trade with each other. The individual banks or brokers trade without an intermediary exchange. Even if it is not a regulated market, there is a code of conduct that participants adhere to so that they can continue to buy and sell in the future.
There are a handful of key places where most of the revenue is generated. From this, most forex brokers take their rate and give one Average rate to the customer. For the customer of a forex broker, however, it is much easier than it sounds. You only need an account with a forex provider and you can start trading. Some brokers give the customer leverage right from the start, so that one can trade the developments in the foreign exchange markets with a larger position.
Have prevailed here Leverage from three to five, but some brokers even offer a leverage of 100. With just € 1,000 you can already use an amount of € 5,000 with the leverage of 5. The leverage effect is important because currencies do not make large percentage changes. A change of 1% in one day is common for the DAX, for example, but already a very strong movement on the currency markets.
What is the Forex Market?
The foreign exchange market is one of several components of the financial market. The Currency market (alsoFX market, Forex, Foreign exchange market) is a sub-market of the financial market where the supply and demand for foreign exchange meet and are exchanged at the traded exchange rate.
Trading partners must adhere to the current exchange rate without restriction in the forex market.
Why are foreign currencies traded as currency pairs?
Foreign currencies do not only play a role when someone goes on vacation and wants to exchange currencies for it. Foreign currencies are financial products that are primarily used with the Supply and demand of the respective currency related.
Foreign currencies will be only traded in currency pairs. That has to do with the fact that one looks in vain for a concrete offer for a euro or a yen, because the price always has to be expressed by another currency. The US dollar only has a value if, for example, it has a value. B. is expressed in euros or francs. Some currency pairs are more relevant than others, and so will them Majors called.
The most important currency pairs (majors) in Forex trading
- AUD / USD: Australian dollar versus US dollar
- EUR USD: Euro versus US dollar
- GBP / USD:British pound versus US dollar
- USD / CAD: US dollars versus Canadian dollars
- USD / CHF: US dollars versus Swiss francs
- USD / JPY: US dollar versus Japanese yen
What is a Forex Exchange?
A Currency exchange is an exchange on which foreign currencies are traded. The middle rates determined there serve as an orientation for investors for the value of a currency. With the introduction of the euro, the determination of the mean exchange rate that was previously necessary in Germany was no longer necessary. Exchange trading in foreign exchange has lost some of its importance in Germany. The way in which a foreign exchange exchange works can be compared to a stock exchange, because the exchange rates of the various currencies are also based on supply and demand.
Types of Forex Trading
|Types of foreign exchange transactions||particularities|
|Foreign exchange arbitrage||Course changes move into the background here. Only the spread between the buying and selling price is relevant.|
|Foreign exchange swaps||One trading partner makes foreign currency available to the other trading partner. At the same time, the buyback is regulated (time and rate).|
|Forward foreign exchange transactions||Here the trading partners regulate among themselves when and at what rate the currency exchange should take place.|
|Spot foreign exchange transactions||It is difficult to speculate in cash transactions. This mainly has to do with the period of time between the closing of the deal and its fulfillment. The currency exchange is in the foreground.|
Different ways to trade forex
If you want to do forex trading, you have several options. In principle, investors want to take advantage of developments in exchange rates. To do this, they place trades on the corresponding currency rates. Broker can make it easier to get started with Forex trading or the currency markets. Not just foreign exchange and funds, also so-calledCFDs (Contracts for Difference) offer the opportunity to become active in Forex trading.
Basically, CFDs are financial products that make it possible to bet on rising or falling prices. Buyer and seller enter into a contractual relationship and regulate payment.
Speculating in CFDs carries great risks and should be considered carefully. With the individual CFD brokers you can see, mostly at the bottom of the page, how many traders are winning or losing money here. Pay particular attention to the fees.
Basis for currency trading: How is the rate of a currency created?
How high the price of a currency depends on how big it is supply and demand are on the foreign exchange market for this foreign currency. For example, if companies from England make large investments in the European Economic Area before Brexit, there will be greater demand for euros. This will then be in relation to the British pound upgraded. Last but not least, it is also reserved for a central bank to influence the course by intervening.
Difference between quantity and price quotation
Exchange rates can be listed in two forms. In the Quantity quotation the exchange rate provides information about the relationship between foreign currency units and the respective domestic currency unit. This means that, for example, € 1 corresponds to the value of 117 yen.
In contrast to the quantity notation, the Price quotation as follows: The exchange rate shows what a foreign currency is worth in a currency such as the euro. For example, 1 AUSD is worth $ 0.60.
What is the difference between the bid and ask prices?
Two of the most important technical terms in the context of bond listing are Bid rate and the ask rate. Many financial pages that also include bonds in the price display usually show both prices. At the same time, however, the question often arises as to which of these two rates should be used when buying or selling the bond.
TheBid priceis the course that is determined by the person who does theDoesn't own money yet. Therefore this is the demand rate. In contrast to this is the provider, who accordingly the stocks or bonds and thus alegal right owns the one who owns theAsk rate certainly. The ask price was thus an offer price.
As a rule, this has a higher level than the bid price, since the seller wants to achieve the highest possible price. The buyer, on the other hand, wants to pay as little as possible.
What is the spread when trading forex?
The so-called spread in the foreign exchange business is an important one Cost factor This is the difference or respectively Spread between the bid price and the ask price. Both are provided by the broker. For many brokers, the spread is the fee that has to be paid between the bid and ask prices for a trade. The Broker's fees it itself often already has it in the spread priced in, since it is not uncommon for a broker to take the opposite position of the investor.
What is the economic impact of forex trading?
Depending on whether an exchange rate rises or falls, forex trading affects the economy. In the event of a rising exchange rate, Products from a currency area are cheaper abroad become. Of course, this calls for other countries to express their interest in these products. So the demand increases and theExport is increased.
However, there is less interest in products from other currency areas as the prices for certain products rise. The Imports are therefore falling. Basically, there is a risk of oneinflation broad - the amount of money increases sharply, but the amount of goods decreases.
Contrary developments emerge when exchange rates do not rise but fall. Foreign countries have little interest in the products of a currency area, since the Prices abroad skyrocket.Export losses are the consequence. Because the goods are cheaper abroad, the interest in these products increases and one comes into being Increase in imports.
If you have a weak currency, you can get the tourismcrank. After all, low prices have an enticing effect. When prices are falling, the risk of inflation is low. Workers, however, have to tremble more for their jobs when there is a drop in exports.
Central banks hold foreign currency reserves
Central banks like that Federal Reserve, European Central Bank, Bank of Japan or also the Bank of England Of course, they have a great interest in building up a certain amount of liquidity so as not to suffer from a bottleneck. So if there are certain shortfalls internationally, you can take them with you Foreign exchange reserves be compensated. Foreign exchange reserves can also be used to influence exchange rates. That is possible when domestic currency and foreign exchange are sold or bought.
Which countries hold the most foreign currencies?
BehindChina is the front runner belongs afterwardsJapan to the countries with the largest currency reserves in the world. The first representative from Europe is Switzerland with third place. Anyone who expects Germany to be among the top ten is mistaken. With around 213 billion US dollars, Germany ranks twelfth in this ranking (June 2019).
Conclusion: advantages and disadvantages of private forex trading
Forex trading is not a fully predictable endeavor. Despite the risk of financial loss that can never be ruled out, Forex trading is one of many investors tempting trading instrument. There are also reasons for this. In comparison to other financial products, private forex trading has advantages.
Already with manageable financial resources the way into forex trading is clear for potential investors. Basically, forex trading flexes its muscles in the form of enormous liquidity.Last but not least, Forex brokers facilitate entry and generally make trading in foreign currencies attractive.
Those who have few financial resources should not jeopardize them. Payments to a trading account may be necessary which the investor cannot accept. While certain developments and events in politics and society have always had similar effects on the foreign exchange market accurate forecasts yet not possible.
Rather, developments can occur that are beyond what was forecast by brokers. Foreign exchange trading could therefore also be described as a trading instrument that occasionally tends to be unwelcome moody.
The business with foreign exchange is by no means a safe bank - even professionals cannot plan success with certainty, but they can better assess the risks and opportunities. Those who find it difficult to live with a major loss should avoid foreign exchange trading.
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