The Forex market, also known as the currency market, Fx market, or Foreign exchange, is an increasingly popular market for investors and traders looking to earn fast profits via currency trading. The currency market is one of the biggest liquid financial markets that processes a trading volume of over $5 trillion daily.
What Is a Base and Quote Currency?
A base and quote currency is a part of the currency pair. A forex currency pair has a simple structure: The first currency is called the base currency in the currency pair, and the second currency is known as the quote currency. The quote currency is also called the counter currency. It shows how much quote currency is required to buy a unit of the base currency.
The currency price you view in the Forex market is the present Forex base currency price against the quote currency price. In a currency pair, one currency is higher in value than the other. The currency strength isn’t constant and keeps changing due to some specific reasons, like, noteworthy financial events.
What Moves the Forex Market?
Let us examine the main factors that move the forex market:
Supply and Demand: One of the key factors that move the Forex market is demand and supply. If the world requires more dollars, then the worth of dollars rises, and if too many get circulated, the rate drops.
Inflation Rates: A change in the market inflation can cause changes in the currency exchange rates. If a country has a low inflation rate than the other, it will experience a rise in its currency value. A country with a constantly low inflation rate sees an increase in currency value, whereas a country having a high inflation rate sees depreciation in the currency value and is accompanied by a high-interest rate.
Interest Rate: A change in interest rates can affect the currency value and the dollar exchange rate. Interest rates, inflation, and Forex rates are all correlated. An increase in the interest rate can make the currency of a country appreciate. A high-interest rate will offer high rates to the lenders. Thus, it will draw more foreign capital leading to a rise in the exchange rates.
Speculation: When a currency of a country is expected to increase in its value, traders demand more of the currency to make profits in the future. Therefore, the currency’s value will rise because of high demand. So, with this rise in the currency value, the exchange rate will also increase.
Recession: If a country faces a recession, then its interest rate will fall. It, in turn, will decrease its possibilities to get foreign capital. Therefore, its currency weakens as compared to other countries, thus dropping its exchange rate.
Government Debt: It is national or public debt owed by the central government. A country that has government debt is probable to get foreign capital, resulting in inflation. Foreign traders will sell bonds in an open market when the market forecasts government debt in a specific country. Therefore, a decrease in exchange rate value will appear.
Which Currencies Are Traded in the Currency Market?
When you trade in the currency market, you are trading-in a specific currency pair always. For example, if you are trading-in EUR/USD, then EUR is a base currency, and USD is a quote currency. Hence, when you purchase EUR/USD currency, you are purchasing EUR and selling USD.
Six pairs account for over 80% of total trades in this currency market. These are also known as majors. They include:
Other than these currency pairs in the currency market, there are exotic pairs and minor pairs. Exotics are currency pairs with a major and a currency from the smaller economy. Minors are currency pairs having lower trading volumes, and it does not include USD.
Strategies for Trading in the Currency Market
An efficient currency trading strategy can help determine which currency pairs you should trade-in, the exit/ entry points, and the size of every position that controls the trade’s risk.
Below are a few of the most effective strategies for trading in the currency market:
Price Action Strategy: It is one of the most commonly used Forex trading strategies. It is based on price actions only instead of techniques or indicators. It involves understanding who exactly controls the present price, bears or bulls, and then accordingly takes actions.
Scalping Strategy: With scalping, traders can make short-term trades that are generally held for a few minutes only. A scalper looks to beat the offer/bid spread. He/she can skim some pips of profits before exiting. Scalping is an advanced Forex trading strategy.
Swing Trading Strategy: In this strategy, positions are held for many days. It is best for traders looking to make profits from short-term patterns. With this strategy, a trader may look at bars every 30 or 60 minutes.
Day Trading Strategy: In this strategy, traders exit before the day ends. It removes the possibility of getting affected adversely by big movements overnight. This strategy is common among beginners. Trades last only for a few hours.
Position Trading Strategy: For those who want to maximize their profits from big moves in the prices by following long-term trends, position trading strategy is perfect. The best position trading strategy needs patience and discipline. It also requires lots of knowledge about the market basics.
The currency market works by facilitating trade and exchange of currencies. It is the biggest financial market in the world. So, with the knowledge and experience, traders and investors can maximize their benefits and profits. But creating the right strategies to become a successful trader will take time. You should first open a demo account with a good broker and start trading without investing real money. It will help you get enough confidence and experience to trade-in this large currency market with real money. Therefore, apart from this if you want to trade at the forex market or currency market then you must try AvaTrade, as it provides wonderful facilities and advantages and by that, you can earn huge profit in return.