Forex Tutorial: What is Forex Trading? The forex currency forex system trading exchange market is the “place” where currencies are traded.
Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U. The need to exchange currencies is the primary reason why the forex market is the largest, most liquid financial market in the world. It dwarfs other markets in size, even the stock market, with an average traded value of around U. One unique aspect of this international market is that there is no central marketplace for foreign exchange. There are actually three ways that institutions, corporations and individuals trade forex: the spot market, the forwards market and the futures market. The forex trading in the spot market always has been the largest market because it is the “underlying” real asset that the forwards and futures markets are based on.
In the past, the futures market was the most popular venue for traders because it was available to individual investors for a longer period of time. More specifically, the spot market is where currencies are bought and sold according to the current price. When a deal is finalized, this is known as a “spot deal”. What are the forwards and futures markets? Unlike the spot market, the forwards and futures markets do not trade actual currencies.
Instead they deal in contracts that represent claims to a certain currency type, a specific price per unit and a future date for settlement. In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves. In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange. National Futures Association regulates the futures market. Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. Both types of contracts are binding and are typically settled for cash for the exchange in question upon expiry, although contracts can also be bought and sold before they expire.
The forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets in order to hedge against future exchange rate fluctuations, but speculators take part in these markets as well. Note that you’ll see the terms: FX, forex, foreign-exchange market and currency market. These terms are synonymous and all refer to the forex market. Investopedia is part of the Dotdash publishing family. A forex trading system is a method of trading forex that is based on a series of analyses to determine whether to buy or sell a currency pair at a given time.
Forex system trading could be based on a set of signals derived from technical analysis charting tools or fundamental news-based events. For short-term day traders, a forex trading system is usually made up of technical signals that create a buy or sell decision when they point in a direction that has historically led to a profitable trade. Forex trading systems can be either manual or automated. A manual system involves sitting at the computer screen, looking for signals and interpreting whether to buy or sell. In an automated trading system, the trader “teaches” the software what signals to look for and how to interpret them.
Both automated and manual day trading systems and signals are often available for purchase. It is important to note that there is no such thing as the “holy grail” of trading systems. If the system was a perfect money maker, the seller would not want to share it. This is why large financial firms keep their “black box” trading programs under lock and key. System traders will often use other asset classes such as equities, bonds, and commodities that may be correlated or negatively correlated to determine their trading strategy. The offers that appear in this table are from partnerships from which Investopedia receives compensation. A forex signal system interprets data to create a buy or sell decision when trading currency pairs.