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Foreign exchange (forex or FX) trading involves exchanging one currency for another to profit from fluctuations in exchange rates. It is a legal activity in the UK and is regulated by the Financial Conduct Authority (FCA).
How Does Forex Trading Work?
Forex operates 24 hours a day across four major trading centers: London, New York, Tokyo, and Sydney. When trading ends in one center, it continues in another, ensuring continuous market activity.
Traders aim to profit by predicting currency movements:
- Going Long: Buying a currency with the expectation that its value will rise, then selling it later at a higher rate.
- Going Short: Selling a currency with the expectation that its value will fall, then buying it back at a lower rate.
Forex trading typically involves transactions between institutional traders representing banks, financial institutions, and multinational companies, rather than physical delivery of currencies.
Why Trade Forex?
Forex trading serves various purposes:
- Hedging: Companies and individuals use forex to protect against currency and interest rate fluctuations. For instance, multinational companies might hedge against risks from international transactions.
- Speculation: Traders also speculate on currency movements influenced by political events, geopolitical developments, and natural disasters.
How is Forex Traded?
Forex trading occurs over-the-counter (OTC), meaning it is conducted electronically through a network of banks and financial institutions, without a centralized exchange.
With the advent of online trading platforms and smartphones, individuals can now trade currencies directly. Previously, traders relied on brokers to facilitate trades.
Popular Currencies
Currencies are identified by three-letter codes, similar to stock ticker symbols:
- US Dollar (USD)
- Euro (EUR)
- Japanese Yen (JPY)
- British Pound (GBP)
- Australian Dollar (AUD)
- Canadian Dollar (CAD)
- Swiss Franc (CHF)
- New Zealand Dollar (NZD)
There are over 170 currencies globally, but the ones listed above are the most traded.
