How Does Foreign Exchange Trading Work?

According to Alan Safahi, a leading San Francisco startup founder, advisor, and entrepreneur, foreign exchange trading, also known as forex trading, is a global marketplace that focuses on exchanging currencies against one another and involves the relative value of one specific currency over another.

Research conducted by Alan Safahi of Orinda, CA highlights that forex markets are the largest and most liquid asset markets worldwide due to streamlined trading, commerce, and finance. The foreign exchange market has a colossal amount of liquidity, enabling people to actively trade trillions of dollars every trading day. In today’s article, we will discuss how foreign exchange or forex trading works? Read on!

Currency Value Measurement

A currency value is analyzed and measured through the amount of another currency it can purchase. The process is known as the price quote, which contains two prices: a bid and ask. People use the “ask price” when buying a currency. Likewise, traders use the bid price when selling currencies.

Bear in mind that a financial instrument’s ask price is usually higher than the bid price, meaning a bank purchases your currency at slightly lower prices. In contrast, the bank will sell it at a higher rate. Safahi advises traders to learn the basic and advanced concepts of a bid and ask price to measure currency value.

Liquidity Analysis

According to Safahi, liquidity refers to the activity levels of the market. Traders determine liquidity by analyzing the number of traders who are actively trading and measuring their total volume.

Because forex trading occurs 24/7, it is the most liquid market in the world. More liquidity means tighter spread, which favors everyone. Because trading is ongoing, traders can conduct it smoothly with plentiful liquidity. However, Safahi advises traders to keep an eye on price gaps to evaluate significant price shifts over the shortest periods.

Placing a Buy Order

Traders must focus on forex mechanics. You can trade at the click of a mouse on any trading platform. For instance, you will place a buy order on the USD/EUR currency pair and use a portion of funds from your account to buy the pair’s base currency. For example, you will buy the USD and sell the pair’s quoted currency, the EUR.

You will place the order with the broker, market maker or communicate with the Forex Interbank Market directly. Remember, the interbank market has big players. Safahi states that you can place orders to sell currencies that you don’t own.

Close the Order

Depending on your trading strategies, you will wait until your purchased currency has increased value relative to the sold one. When you are satisfied with the accumulated profit, you will close the order.

Likewise, the broker will perform the opposite transactions – selling dollars and purchasing euros. Bear in mind that you can also place a sell order to reverse the process. Understanding these concepts is essential for beginners to streamline their trading.

Final Words

It is often confusing for beginners to understand the concepts of buying and selling in foreign exchange markets because, in every trade, traders exchange one currency for another. It means there is always a “buy” and “sell” in every trading process.

Originally Posted: https://alansafahi.com/how-does-foreign-exchange-trading-work/

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