What is Forex Trading and how does it work?

Forex (FX) is also known as foreign exchange and refers to currency trading. In Forex Trading, one currency is simultaneously bought while another is sold. This means that two different currencies, i.e. a currency pair, are always involved in a transaction.

Since Forex Trading revolves around currency or foreign exchange trading, the Forex Trading market is also called the foreign exchange or currency market. Incidentally, this is the world’s largest financial market.

Definition and principles of the Forex market

In global Forex Trading, both private clients and companies can either buy or sell a currency pair, which usually consists of the national currency and the currency of another country. The first pair is also referred to as the base currency, while the second is called the quote currency or counter currency.

The key stakeholders in the forex market

Central banks play a particularly important role in Forex Trading, as they control interest rates and can thus influence the value of their respective currencies. The following institutions are considered the most important central banks:

• ECB (European Central Bank)
• Fed or Federal Reserve (US Federal Reserve)
• BoE (Bank of England)
• BoJ (Bank of Japan)

Important terms and concepts in Forex Trading

Some important terms you need to know in foreign exchange trading (alphabetical order):

• Base currency: the first currency listed in a currency pair.
• Cross currencies: currency pairs that are traded without the US dollar.
• Exotics: rare, exotic currency pairs, also known as ECPs (exotic currency pairs), such as EUR/INR. Please note: these are often subject to significant fluctuations and are only suitable for professionals.
• Holding costs: also known as swap fees, these are incurred for holding a position.
• Quoted currency/counter currency: the second currency.
• Majors: currency pairs that are traded particularly frequently with the US dollar, such as EUR/USD.
• Minors: currency pairs that are traded less frequently, such as EUR/PLN.
• Pip: ‘Price Interest Point’ is the name given to the smallest possible price movement, which refers to the fourth decimal place.
• Spread: difference between buy and sell price.

Good trading hours

In contrast to the stock market, there are no opening prices and corresponding waiting times. Foreign exchange trading is possible at all times.

High liquidity and market availability

Foreign exchange trading works fast and effectively online. So, orders can be processed immediately. Since trading operates globally, there’s a high level of liquidity.

Diversification opportunities in the portfolio

Forex Trading offers an interesting option for diversifying your portfolio. As part of a well-thought-out overall strategy, it can increase opportunities and minimise risks.

What are the risks associated with Forex Trading?

There are more risks involved in Forex Trading than in trading other assets. The four most important issues include the following:

Market volatility and price risks

In Forex Trading exchange rates fluctuate constantly.

Fundamental analysis and market indicators

Geopolitical data is used for fundamental analysis in foreign exchange trading. As a result, the influence of various social and economic events on currency values is taken into account. Some factors are only significant at a regional level, while others have global impact. This type of analysis covers various areas, which can make it more time-consuming and complex.

The analysis is based on several market indicators, i.e. mathematical calculations that the trader makes on the basis of existing volume and price data. For example, the ‘moving average’ is used to calculate the average price trend in order to identify potential trend reversals at an early stage. With the so-called MACD (Moving Average Convergence/Divergence)¹, two moving averages are compared with each other for the same purpose. The RSI (Relative Strength Index)² is also useful, as it helps determine the speed and strength of price movements.

¹ The MACD (Moving Average Convergence/Divergence) is a technical analysis indicator used to identify changes in the momentum value of financial securities.

² The RSI (Relative Strength Index) is a price trend indicator that is particularly useful for identifying short-term lows or highs in price movements.

Risk Management in Forex Trading

The importance of a solid Risk Management

Due to price fluctuations, large profits as well as high losses are possible. Therefore, it is equally important to implement a well-functioning risk management system.

ODDO BHF Services in Forex Trading

ODDO BHF operates in the foreign exchange markets for over 100 years, offering all clients comprehensive services and personalised international banking solutions.

As a client, you benefit from our expertise in Forex Trading. We offer electronic trading on a scalable eFX platform as well as a personal contact for each client. This contact person is always available to respond flexibly to any request. For FX trading, we provide access to more than 125 currency pairs in 35 tradable currencies.

We would be pleased to advise you in detail about further services and offerings for your specific requirements. Please feel free to contact us at any time!

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