How the Forex Trade Works

Forex trading or foreign exchange allows investors to speculate on the changes in various  currency strengths over time and trading the currencies by either buying or selling one against the other.

Forex traders aim to profit from the fluctuations experienced in the exchange rates of the currencies, speculating on whether a specific currency’s value, such as the pound sterling, will go up or down in relation to the other, for instance the US dollar.

The forex market is the most traded financial market globally, making it a highly liquid and dynamic market. High market liquidity basically means that prices can rapidly change in response to important news and short-term events which in turn creates multiple trading opportunities for the retail FX investors.

Saxo Capital Market is an award-winning forex trading platform that offers UK traders a fast, reliable access to the financial markets from ones’ phone, tablet, laptop, or a multi-screen desktop setup. Their In-house analysts provide relevant news and commentary concerning all the major asset classes with live market commentary, risk management and trade support information to enable the traders make wise financial decisions and achieve profitable investments.

How does Forex trading work?

FX is always quoted in pairs that are one currency versus the other. For example, in the Sterling pound versus the US dollar (GBP/USD) – any fluctuations in the exchange rate between the two is where a trader looks to make a profit.

The first currency known as the base is the one that you predict it will either go up or down against the second currency known as the quote.

When trading the currencies, one can speculate on the future direction of the FX market, taking either a buying or selling position but depending on whether the trader thinks the value of the currency will rise or fall. The price movements are caused by currencies either increasing in value (strengthening) or depreciating in value (weakening).

Which currency pairs? 

The commonly traded currency pairs are divided into 3 groups related to their popularity and liquidity, they are known as: majors, minors and exotics. At Saxo one can access 182 currency pairs across the majors, minors, exotics and even metals.

  • Majors

Majors are the most liquid currencies and the most actively traded. They constitute about 85% of the total forex trading volume in the markets. The spreads of majors is usually tighter compared to the less traded minor currency pairs.

  • Minors

This are not traded as much as the major currencies hence tend to fluctuate more often.  The spreads for the minor currency pairs tends to be wider due to the medium sized liquidity in the FX market, compared to major currency pairs. 

  • Exotics

Exotics are currency pairs that are rarely traded. Due to their low volumes of trade, this currency pairs are not liquid making them expensive to trade with wider spreads.

A lot of traders view the exotic currency pairs as having a much higher risk profile compared to commonly traded currency pairs.

Forex trading is ideal for people who are?

The activity of forex trading in Saxo is ideal for those who want an opportunity to trade on a market that is open for 24 hours every day, reducing the trading costs while potentially profiting from the FX markets that are rising or falling.

However, it contains significant risks to your money and is not suitable for everyone since the
prices are mainly influenced by economic and political conditions.

Changing situations such as interest rates, inflation, and political instability usually have a short-term impact on the financial market, so trades are typically held open for a few days or weeks rather than over the longer term.

But for those who want to make their own decisions on what to invest in Saxo Capital Markets provides a client-focused execution using their order driven model which results in higher fill-rates and fewer premature stop outs.

Leave a comment

Your email address will not be published.