Want to jump straight to the answer? The best forex broker for most people is definitely FOREX.com or IG.
Trading currencies in the decentralized forex market is somewhat different from trading shares of stock or other financial assets on centralized exchanges. Not only does the forex market lack the same degree of regulation as exchanges, but the national currencies traded in it are quoted relative to each other as pairs. This currency pairing process also means traders take a long or short position in one currency against an opposing short or long position in the other currency.
Rather than transacting at a forex price, traders instead exchange currencies at an agreed-upon exchange rate. Exchange rates continuously fluctuate for a variety of reasons, so knowing what causes currencies to shift in value can be invaluable when operating in the forex market.
What is Forex?
Forex is a common nickname for the foreign exchange market. This financial market consists of a worldwide, decentralized and mostly unregulated market for the trading of national currencies. The forex market operates through a vast network of financial institutions located primarily in the world’s large money centers, which include New York, Tokyo, London and Sidney.
Unlike stocks or commodities that typically trade on regulated exchanges at a price, currencies do not trade at an absolute price but instead trade at a relative value against other currencies. The term “exchange rate” is therefore strongly preferred over “forex price” among professionals and experienced forex traders because it more accurately describes the way the value of one currency is expressed in terms of another currency in a forex quote.
Even though currencies have been traded throughout history, the forex market’s most recent form began with the breakdown of the Bretton Woods exchange rate agreement that arose after World War II. This system fixed the exchange rates of participating nations’ currencies against the value of the gold-backed U.S. dollar, which was in turn convertible into gold at the fixed price of $35. This led to the U.S. dollar becoming the world’s reserve currency after WWII.
The Bretton Woods agreement traumatically broke down after the “Nixon Shock” of August 1971, when U.S. President Richard Nixon unilaterally took the U.S. dollar off of the gold standard. The consequence of this was that the U.S. dollar and all currencies formerly pegged to it eventually began to “float” against one another. That floating exchange rate system exists to this day.
The modern forex market is huge, with an average daily trading volume that was recently measured at $6.6 trillion. Furthermore, the national currencies traded in it are all fiat currencies, which means they are backed only by public trust in the national government that issues the currency. As a result, they have no hard assets like gold or silver backing their value up.
What is a Currency Pair?
Currencies trade in pairs in the forex market, which is how their relative value is determined. An example of a currency pair would be the U.S. dollar quoted against the Canadian dollar. This pair is generally abbreviated “USD/CAD” using the conventional 3-letter International Organization for Standardization (ISO) codes associated with each national currency.
When you trade a currency pair, you buy or “go long” one currency, and you simultaneously sell or “go short” the other currency. In other words, you take a forex trading position at a rate of exchange instead of buying an asset, as you would do in the stock market.
While around 180 currencies are presently recognized by the United Nations, only about 130 of them trade independently or are pegged to a currency basket. Although currencies trade most actively versus the U.S. dollar because of its prominent reserve currency status, any of the tradable currencies can be exchanged for another tradeable currency.
What Causes Exchange Rates to Fluctuate?
While certain countries maintain policies that limit exchange rate fluctuations for their currency against the currencies of important trading partners, in a floating exchange rate environment the market determines each currency pair’s exchange rate in response to many fundamental influences.
These can include flows due to international trade and investment, as well as changes in relevant inflation and benchmark interest rates. Shifts in key economic factors can also affect exchange rates. Greater detail on each of these fundamental market-moving factors appears below.
International trade flows
A key influence on the value of a currency is its issuing country’s merchandise trade balance. This important economic indicator reflects the difference expressed in local currency terms between the value of items imported into and exported from the country.
Cross-border capital flows for investment
When a substantial amount of money moves from one country to another to buy investments, such as stocks and bonds, these flows can also influence the exchange rate between the affected currencies. Such capital flows are influenced by differentials in yield and investment risk. When all other factors remain equal, higher-yielding foreign securities tend to look more attractive to domestic investors versus domestic securities.
Inflation rates
Inflation rates can also affect exchange rates. Inflation is the reduction in a currency’s purchasing power due to its issuing country’s money supply growing faster than its real gross domestic product (GDP). Because an inflationary situation means there will be more money chasing fewer goods, the prices of those goods then rise. A difference in the inflation rates between two currencies typically shifts their relative value in favor of the currency with the lower inflation rate.
Purchasing power
How items are priced in two counties can also impact their currencies’ exchange rates as a result of the concept of Purchasing Power Parity (PPP). This suggests that a specific good or basket of goods should ideally have the same value in either country given the current exchange rate. While exchange rates can deviate substantially from their ideal PPP levels, in theory, they should eventually adjust closer toward their PPP value to reflect prevailing price levels in each country.
Economic factors
When an unexpected shift in an important fundamental economic factor for a particular nation occurs, then that will usually shift its currency’s value against all other national currencies. This is one reason that forex traders watch global and domestic current events closely that are relevant to any of the currencies they have positions in.
How to Get the Best Forex Rates
Forex rates can be assessed for quality by noting how narrow the difference between a market maker’s bid and offer quote is. Although the best forex rates are usually provided by brokers with the tightest dealing spreads, it can happen that a broker with a wider dealing spread is actually showing a better bid or offer rate that might suit you even better, depending on whether you want to sell or buy a particular currency pair.
People trade currencies in the forex market around the world and around the clock during the trading week. The decentralized nature of the forex market also allows it to remain open 24 hours a day starting at 5 p.m. EST on Sunday upon the opening of the market in Australia. The market then trades continuously during the trading week until 5 p.m. EST on Friday when the U.S. forex market closes. Some trading hours do exhibit better liquidity than others and that can result in tighter dealing spreads during those hours.
Also, if you want to get a better rate than the market is currently showing, then you can wait to see if the market will move to the exchange rate you prefer. You can either watch the market yourself or enter a limit order with your broker that will get filled when the market trades at your chosen level.
Forex Trading Services
Many online forex brokers now exist that provide smaller retail clients with access to the forex market and allow them to open demo or trading accounts. Demo accounts are typically used to test out a broker’s services, practice trading or test a trading strategy. After you decide to open a live trading account, you can then trade on your own or copy another trader with a decent track record.
You can even develop or pay to use an automated trading robot. This software can help make your life easier by monitoring the forex market and doing all the trading for you based on preset parameters.
It can definitely take time to learn how to trade forex successfully on your own, and some people just never get there or show uneven results. If you are a novice concerned about the financial risks involved in trading forex, then trading on your own probably has the greatest risk of seeing your trading account become depleted by losses.
Are Forex Trading Courses Helpful?
Yes, forex trading courses typically offer a very helpful way to get introduced to the forex market. To make selecting one easier, Benzinga has a review of the best forex trading courses currently available.
Another decent educational option is reading an expertly-written introductory book on forex trading or watching videos on forex trading topics you wish to learn about. For more personalized attention that will provide tailored advice and address your specific trading issues, you can enlist the services of a forex trading mentor.
Best Forex Brokers
Benzinga has taken a lot of the work out of finding a suitable and reputable online forex broker to trade currencies through. Just review the list below and contact any brokers that seem appropriate for you.
Is Forex Trading Suitable for You?
If you have enough patience to learn how forex trading and the forex market works, in addition to the incentive and time to put together a successful and easy-to-follow trading plan, then you might just be able to make a career trading forex.
On the other hand, if you would prefer to participate in the forex market without getting too involved, then you could just open a social trading account to copy the transactions of an experienced and successful trader. In any case, make sure to come back to Benzinga often to check for more expertly written articles about forex trading.
Frequently Asked Questions
Is forex good for beginners?
It is easy to start trading forex as a beginner, although it is far harder to become a successful forex trader. It helps to educate yourself before taking substantial financial risks and to copy more experienced traders with a successful track record while you are still learning.
What is the forex rate today?
Most forex rates change just about every second, so you will need to check Benzinga’s live forex rate quote page for real-time exchange rate information.
FOREX.com, registered with the Commodity Futures Trading Commission (CFTC), lets you trade a wide range of forex markets plus spot metals with low pricing and fast, quality execution on every trade.
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https://www.benzinga.com/money/forex-price/
2021-09-25 15:28:46Z
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