**Understanding Forex Trading: A Comprehensive Beginner’s Guide**
*Based on content originally presented by UKspreadbetting on YouTube: “What is Forex and How Does it Work?”*
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## Introduction to Forex Trading
Foreign exchange, commonly known as Forex or FX, refers to the global marketplace for trading national currencies against each other. With daily trading volumes reaching over $6 trillion according to the Bank for International Settlements (BIS), Forex is the largest financial market in the world. Unlike stock markets which are centralized, Forex operates as a decentralized, over-the-counter market, available 24 hours a day, five days a week.
## What is Forex?
– **Forex (Foreign Exchange)**: A network of buyers and sellers exchanging currencies at agreed-upon prices.
– **Purpose**: Facilitates international trade and investment by enabling currency conversion. For example, British companies can import products from the US and pay in dollars even though they earn in pounds.
– **Participants**: Includes central banks, financial institutions, corporations, hedge funds, retail traders, and governments.
## Key Forex Market Features
– **Decentralized Market**: No central exchange; transactions occur electronically via computer networks.
– **Major Global Hubs**: London, New York, Tokyo, Sydney, and Frankfurt.
– **Currencies**: Most often traded in pairs such as EUR/USD (Euro/US Dollar), GBP/USD (British Pound/US Dollar), USD/JPY (US Dollar/Japanese Yen).
– **Nature of Trading**: Currencies are traded in pairs, meaning when you buy one, you sell another.
## How Does Forex Trading Work?
Forex trading relies on the fluctuations in currency values relative to each other. The foundational concept is that as one currency strengthens or weakens, traders can profit by buying or selling accordingly.
### Understanding Currency Pairs
– **Base Currency**: The first currency in a pair (e.g., EUR in EUR/USD).
– **Quote (Counter) Currency**: The second currency (e.g., USD in EUR/USD).
– **Exchange Rate**: Amount of the quote currency needed to purchase one unit of the base currency.
#### Example:
If EUR/USD is priced at 1.1500, it means it costs 1.15 US dollars to buy one Euro.
### Types of Currency Pairs
1. **Major Pairs**: Most traded, including USD. Examples: EUR/USD, GBP/USD, USD/JPY.
2. **Minor Pairs**: Don’t include USD but involve major global currencies. Examples: EUR/GBP, EUR/AUD.
3. **Exotic Pairs**: Include a major currency and an emerging or smaller economy’s currency. Examples: USD/TRY (US Dollar/Turkish Lira), USD/SEK (US Dollar/Swedish Krona).
## Why Do Prices Move in Forex?
Currency prices are influenced by a variety of global factors, including:
Read more on AUD/USD trading.