Stocks and mutual funds are traded on a centralized exchange, such as the Nasdaq or New York Stock Exchange (NYSE). Forex is not. Instead, it’s traded through the foreign exchange market,
Which is managed by banks and other financial institutions. All trades take place electronically and trading can be done 24 hours a day, 7 days a week.
Forex trading can be done through a brokerage. There are three ways you can trade foreign currency:
Spot trading: In this kind of trade, currency pairs are exchanged when the trade is settled. This is essentially instant trading and the spot price represents the price at which a currency can be bought or sold.
Forward trading: When you trade forex forward, you agree to buy or sell foreign currency at a set price on a set date in the future. The spot price will be settled and you’ll be insulated from volatility when it’s time to trade.
Future trading: Future trading s similar to forward trading, with one key difference. In a futures trading contract, you’re legally bound to make the trade.
The price of the contract is based on the foreign exchange rate of the currencies involved.
Once you’ve decided how to trade, you determine whether to buy or sell. The exchange rate may influence that decision. If you’re buying a pairing, you expect the base currency will go up in value.
If you’re selling a pairing, you’re selling the base currency and buying the quote currency. You’re also hoping the base currency’s value will drop so you can buy it back at a cheaper price.
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