Foreign exchange trading

Forex trading, also known by the name of currency trading or FX trading, refers to buying a particular currency while selling another in exchange. Trading currencies always involves exchanging one currency for another.

The ultimate aim can vary and can be any of the below but not limited to the below:

• 1. Exchanging currency A (e.g. USD) to currency B (e.g. EUR) for travelling purposes;
• 2. Exchanging currency A (e.g. USD) to currency B (e.g. EUR) for trading purposes;
• 3. Exchanging currency A (e.g. USD) to currency B (e.g. EUR) for speculative purposes, with the goal to make a profit.

Due to all the above, and not limited to the above, the forex trading market is today the world’s most liquid and most volatile market, with over $5 trillion traded daily.

Forex trading is in essence trading currencies for one another. As such, an XM client sells one currency against another at a current market rate.

In order to be able to trade, it is required to open an account and hold currency A and then exchange currency A for currency B either for a long term or a short-term trade, with the ultimate goal varying accordingly.

Since FX trading is performed on currency pairs (i.e. the quotation of the relative value of one currency unit against another currency unit), in which the first currency is the so-called base currency, while the second currency is called the quote currency.

For example, the quotation EUR/USD 1.2345 is the price of the euro expressed in US dollars, which means that 1 euro equals 1.2345 US dollars.

Currency trading can be carried out 24 hours a day, from 22.00 GMT on Sunday until 22.00 GMT on Friday, with currencies traded among the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Paris, Sydney, Singapore and Hong Kong.

There is an endless number of factors that all contribute and influence the prices in forex trading (i.e. currency rates) daily, but it could be safe to say that there are 6 major factors which contribute the most and are more or less the main driving forces for forex trading price fluctuation:

• 1. Differentials in inflation
• 2. Differentials in interest rates
• 3. Current account deficits
• 4. Public debt
• 5. Terms of trade
• 6. Political and economic stability

In order to best comprehend the above 6 factors, you will have to keep in mind that currencies are traded against one another. So when one falls, another one rises as the price denomination of any currency is always stated against another currency.

Forex trading software is an online trading platform provided to each XM client, which allows them to view, analyze and trade currencies, or other asset classes

In simple terms, each XM client is provided access to a trading platform (i.e. software) which is directly connected to the global market price feed and allows them to perform transactions without the help of a third party.

Forex trading market participants can fall in any of the following categories:

• 1. Travellers or overseas consumers who exchange money to travel overseas or purchase goods from overseas.
• 2. Businesses that purchase raw materials or goods from overseas and need to exchange their local currency to the currency of the country of the seller.
• 3. Investors or speculators who exchange currencies, which either require a foreign currency, to perform trading in equities or other asset classes from overseas or either are trading currencies with the aim of making a profit from market changes.
• 4. Banking institutions that exchange money to service their clients or to lend money to overseas clients.
• 5. Governments or central banks that either buy or sell currencies and try to adjust financial imbalances, or adjust economic conditions.

As a retail foreign exchange trader, the most important factors that affect your trading is trade execution quality, speed and spreads. The one affects the other.

A spread is the difference between the bid and the ask price of a currency pair (buy or sell price), and so to make it even easier it is the price at which your broker or bank is willing to sell or buy your requested trade order. Spreads, however, only matter with the correct execution.

In the forex trading marketplace, when we refer to execution we mean the speed at which a foreign exchange trader can actually buy or sell what they see on their screen or what they are quoted as bid/ask price over the phone. A good price makes no sense if your bank or broker cannot fill your order fast enough to get that bid/ask price.

In forex trading, some currency pairs are nicknamed majors (major pairs). This category includes the most traded currency pairs and they always include the USD on one side.

Major pairs include: EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, NZD/USD

In forex trading, minor currency pairs or crosses are all currency pairs that do not include the USD on one side.

In forex trading, exotic pairs or exotics refers to currency pairs that include a major currency paired with the currency of a smaller or emerging economy. Exotic pairs tend to be traded less frequently, in comparison to majors. They usually have more volatility and are less liquid.