How does currency trading work in detail?
Currencies are always traded in pairs and are represented like this, for example:
The currency named first is called the base currency. The quote currency is called the second currency in the industry. The rate seen here tells you how many dollars one euro can currently buy.
A long position is taken if you assume that the rate of the euro will continue to rise. In this case, you buy the euro and sell the dollar.
a short position is taken if you assume that the euro will fall against the dollar. You sell the euro and buy the dollar.
Profits are possible in both directions, but only if you are correctly positioned. But what drives the prices and how do the quotations come about? To answer this question, let's take a closer look at the participants in currency trading. The players reveal a lot about how the foreign exchange market works.
How does the foreign exchange market work?
- Central banks rarely intervene in currency trading these days. Their instruments are monetary policy and key interest rates. Beyond that, they leave the development of the currencies they put into circulation to the free market.
- Commercial banks that operate internationally have immense reserves of foreign currency. They are considered big players in the foreign exchange market because they can influence exchange rate developments with sums in the billions.
- Banks and insurance companies are also involved in the foreign exchange market, trading to compensate for the now low capital market interest rates.
- Companies expand abroad or import goods and raw materials. Their involvement in the foreign exchange market ensures continuous price movements.
Private individuals have been involved in foreign exchange trading for a few decades. They are the largest group of participants in terms of numbers, but without being able to exert any influence on exchange rate developments.
What do the participants base their price formation on?
Naturally, a currency that is in high demand rises in price and a less desirable currency falls in quotation. The often simplified system of supply and demand is in practice extremely complex in mt4 Exness and dependent on many factors.
Economic data, which are regularly published in the economic calendar, are decisive for the development of a currency. Your broker facilitates currency trading with access to the economic calendar directly in the trading platform.
Each data publication is explained in detail and provided with a volatility feature. As a currency trader, however, you must take into account that the market reacts differently and often unexpectedly to published data.
Figures can lead to rising or falling prices according to their significance. On the other hand, nothing can happen after publication because the values are already included in the price or are ignored.
Sometimes political wishes or demands are also enforced with the price formation. The true background of the price development usually remains hidden from private traders. Media and analysts usually only reflect what is politically correct and desired. Regardless of this, private actors never have any influence on price developments. However, they have the much simpler option of participating via trend following. In order for participation in the foreign exchange market to be crowned with success, the ideal currency pair must be found.
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