Fundamentals of FX Trading

As I further learn about global markets, I thought I should document what I have grasped. Although this mini-series overs the basics, I hope it helps others get a grip on financial fundamentals.

FX (Foreign Exchange/Forex) is the global market for currency exchanges. It is the largest market in operation. Utilising geopolitical trends such as elections, wars and more traders will speculate on currency volatility.

Logistics & relations to exchange rates

1.        The central bank decides to increase interest rates e.g. Bank of England raises rates from 2% to 5%

2.        Foreign investors decided to invest due to these higher returns

3.        To invest they must use the appropriate currency brackets GBP, so they convert their currency into GBP

4.        Demand for GBP rises

5.        GBP holders recognise this change in demand and increase their prices

6.        Various algorithms  collect trading data to create exchange rates in real time used by all e.g. 1GBP = 1.25USD

How to people make money?

Speculative Trading

This is ordinary trading. People attempt to buy low and sell high by predicting market movements.

Arbitrage

This requires automated software that work at incredible speeds. Traders utilise different exchange rates on various platforms. For example, currency A is priced at £1 on ABC Trading but is priced at £1.01 on DEF Trading. Traders will buy currency A on ABC then sell on DEF.

FX is like Amazon

To simplify:

·      Different people sell the same product on various FX trading platforms

·      Each trading platform has an ‘order book’ showing different sellers and buyers

·      People buy the cheapest prices

·      Sellers notice the demand and alter their prices

I hope this brief was helpful! If you enjoyed this feel free to check out the rest of the articles linked here