What is Forex Currency Exchange

by Oct 24, 2018What Is Forex

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There is many currency exchange platforms on the internet and which one to use for exchanging currency is not an easy task. This is the first step that any investor run into when he wants to buy or trade currency.

Before choosing which exchange to use for buying or trading currency you should read this post. It will help you understand as a beginner in Forex trading what is Forex currency exchange and it will help you narrow a list of acceptable exchanges.

What is Forex Currency Exchange

You might have encounter currency exchange in your city and you have asked yourself what is currency exchange or how do they work.

Currency exchange is a platform(web site, office, trading platform) which enables you to buy or sell specific currency. Is that U.S. dollar, Euro, British pound, you will be able to exchange your domestic currency for it.

Some of the currency exchanges do not have all currencies available because they do not have them in their portfolio for some reason(reason can be that financially it is not worth having them or legally they cannot hold that currency).

While you are here you are not asking what is office currency exchange you have in your city or you have seen on the airport. You are asking about those on the internet. Forex exchange. Nevertheless I will explain also office currency exchange so you get better overview.

Currency Exchange Type

Office Currency Exchange

Office currency exchange has a person that accept currency which must convert to requested currency. Accepted currency can be your domestic currency and requested currency can be any foreign currency in the world. You can also exchange foreign currency for domestic currency.

Exchange office gives you the price rate for requested currency. There will be different price for buy or sell because exchange needs to get commission on that trade. Normally, price for buy or sell will not be in your favor but always against your pocket.

If you take a look into picture below you see that for 1 unit of Euro you need to give 7,485000 KN (KN unit is just example). When selling 1 Euro you will get 7,385000 KN. Now you see that when you want to buy or sell 1 Euro, the KN value is not same.

I think you would say that price for buy and sell should be the same because for 1 unit of currency by buying or selling you should give or receive same amount of KN unit. But that is not how things works in exchange market.

It is up to you will you search better price in another exchange office but try to find best one when you have a lot currency to exchange to save costs as much as you can. 

Exchange office

Forex Currency Exchange

Forex currency exchange is called also as Forex market, FX market and it is decentralized market for currency trading. Forex currency exchange rate is determined  on this market and it is a place where participants decide will they buy or sell currencies. Buying or selling, participants trade currency pair in order to earn profit. If they guess correct movement they will earn money.

Forex currency exchange is realized as a platform, website or desktop based software which you can use for exchanging currencies. Easiest way to start participating in Forex currency exchange is to choose Forex dealer and use their platform which is usually MetaTrader 4(MT4) or MetaTrader 5(MT5).

On the platform you can trade trading pairs and make profit but also to lose all what you have invested. Pay attention to this – invest what you can afford to lose.

Forex-market-movement

How Forex Currency Exchange Works

Forex Currency exchange market process trillions of dollars, euros and other currencies everyday on Forex(Foreign exchange) market. On the Forex currency exchange market you can buy or sell foreign currencies.

Forex currency exchange platform allows you to create trading account and participate in deals that take place 24/5 during week. By creating trading account you have an access to the Forex currency market where you make a trade by buying or selling currency. 

On a weekend Forex market is closed and you cannot make a trade. 

With the trading platform dealer give you tools to make a trade, to make technical analysis using trend lines or indicators and other tools that might be helpful. It is up to you how you will use them.

When you open platform first step is to decide which trading pair you gonna trade. You will see price jumping up or down and that is normal, especially if trading pair is liquid. Liquid means that many participant on the market trades that pair. 

Forex exchange platform shows you current price of trading pair and the price is defined by supply and demand of the traded currency. 

Currency Supply and Demand

Price on the trading platform varies all the time. It varies because of supply and demand of specific currency. Supply and demand is created on the market by participant like you and me. If you decide that U.S. dollar is worth more you will sell U.S. dollar currency with higher price and I will pay more for it.

To move market in one direction is not easy so pay attention on my last sentence. You will not move market like big whales(big players). It was just example how system works. 

Big player, institutional and bank participants are ones that can have impact on the market because they have large amount of money. There is fundamental aspect that have impact on the price but this topic I will cover in one of the next posts.

If market is relatively small then this impact will be high on the price but on the Forex which is huge market it will have small impact on the price. 

Supply_demand-new

Forex Currency Exchange Earnings

Forex currency exchange earning is called spread on trading pair. For traders there is difference between buy and sell price, and this difference is called spread. Spread can vary on trading pair where spread for major trading pair is smaller and it is somewhere 0.5-2 pips. 

For minor or cross trading pair spread can be wider which makes your trade more expensive. It is expensive because in the start, when trade is open, you will be in minus. 

If spread is 6 pips you will be in minus 6 pips and you need to wait market to go 6 pips in your direction until you are break-even. If spread is smaller, lets say 2 pips, you will be break-even 4 pips earlier comparing to 6 pips spread which sometimes can be a lot. 

Spread is different on exchange platforms and vary from exchange dealer to exchange dealer. It is income for exchange dealers and whenever you open a trade they immediately earn spread no matter do you, buy or sell, or you earn or lose money on that trade. 

Choose Currency Exchange

Bring a list of your requests before choosing currency exchange platform: 

  • Few small steps for transfer fiat currency to exchange platform – for you is better when there is few steps so you do not lose to much time making exchange. You should save your nerves
  • Few necessary steps for registration
  • Small  fee amount for transferring fiat currency – if fee is to high then you will lose money just for transferring and your buying power will be decreased
  • Small fee amount for buying currency – Also good for avoiding losing buying power
  • Secure exchange so you do not lose money – you want that your money is secure and it will wait for you later on. This can be reviewed through comments from other users
  • Is liquidity high enough – higher volume is better
  • Which trading pair is available – you want to have many pairs for selling and buying
  • Is the user interface friendly – you do not want get lost on the web page/trading platform or make it rocket science just to make a transaction
  • Customer support – if something goes wrong you want that the problem is solved very fast and efficient

Conclusion

Pay attention on differences between exchanges because there is: 

  • Forex currency exchange
  • Office exchange

At the end it is good to pick exchange that fits your need. 

In case of Forex currency exchange – You need to pick which dealer have best trading platform. Usually MT4 or MT5 is standard but some dealers have their own trading platform. Pay attention which accounts for traders they have. Some accounts can have minimum limit for deposit.

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After you are done you will know how to use FREE trading platform to activate order by selecting currency pair on the Forex market and make money.

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To much strange words? Get them clear and start trading!

Frano Grgić

Frano Grgić

A Forex trader since 2009. I like to share my knowledge and I like to analyze the markets. My goal is to have a website which will be the first choice for traders and beginners.

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