Forex trading is the name given to the process of buying as well as selling of various currencies. The value of each currency keeps changing on a constant basis with respect to other currencies based on the requirements of the real users of the currency and the perception of speculators and traders. There are a number of factors that affect the value of a currency with respect to other currencies and this difference in value is the foundation of currency trading.
For better understanding of the Forex market, you may visit the local Bureau de Change operator and ask to change your local currency to the USD. Once you have received US dollars, use these US dollars to buy back the original local currency. There are two things to notice here:
1. Currencies are bought and sold at different rates. So, you would have received less of your local currency when you would have bought it with the US dollar as compared to what you would have paid to buy the US dollar.
2. Also, if you do not exchange the currencies right after buying the US dollar and wait for some time, you will notice that the prices have again changed. The change in prices would have been much higher if you were living in Iran or Venezuela.
This is all there is to understand the way Forex trading works.
In the real world, the Forex trading goes on a much bigger scale as compared to the operation in the Bureau de Change. In the global Forex trading market, all the big institutions such as multinational corporations, retail investors, investors, central banks as well as major banks trade currencies with each other.
As far as the daily turnover of Forex trading market is concerned, it is estimated to be around $4 trillion, which is the biggest financial market in the whole wide world. Similar to all the other trading markets, there are buyers and sellers in Forex trading.
Consider this example to understand how money is made in Forex trading. For instance, there are two traders trading EUR/USD. Trader A is buying EUR and selling USD whereas the trader B is buying USD and selling EUR. If the value of EUR falls with respect to USD, the player B makes some profit whereas the trader A loses some money. The trader A loses exactly the money that has been won by trader B. This is how Forex trading simply works.
The job of bringing buyers and sellers of various currencies together is done by brokers in the real world. Their job is to find sellers for the buyers and vice-versa. The process defined above is repeated hundreds of thousands of times each day on five trading days of the week.
Forex Trading in Binary Options
Similar principles as defined above with some modifications are applied when it comes to trading of currencies in binary options. The modification is that the traders bet on the movement of currency pairs instead of betting on one currency against the movement in another currency.
There are three factors that decide the outcome of Forex trades in the binary options market.
1. The currency pair goes above or below a particular price that can be a price selected by the trader or the market price, once a specific time period has passed.
2. The currency pair goes out of a preset price target or fails to reach that preset target.
3. The currency pair stays within a particular price range or goes out of that price range in either direction within a set time frame.
Forex Trading Process
One of the first things you need to do to get onto the Forex trading bandwagon is to open an account with one of the brokers. We have a complete list of the best binary option brokers in the market. You will need to fill up an account opening form.
In addition to the form, you will also be required to provide a proof of identity as well as a proof of address. For identity proof, you can provide international passport or national ID card and for proof of address, you can give bank account statement or a utility bill. These are needed to activate your account.
After the account has been activated, you will have to fund the account to start trading. Most of the brokers offer multiple methods for funding the account. These funding methods usually include credit cards, bank wires, Moneybookers, other digital currencies as well as PayPal and other such methods.
After funding the account, you can start trading. As you may be aware, Forex market keeps working around the clock which means that you are free to trade currencies anytime. You can look at the fundamentals or the technical charts to make your trades.
However, it has been seen that technical trading is more successful for traders as brokers may not have too many orders to fill on the basis of fundamentals of currencies as far as the binary options market is concerned.