what is forex

What Is Forex? What Are Forex Trading Bots? [And Role of VPS in Forex]

Foreign Exchange or Forex can be described as a network of buyers and sellers who, at an agreed price, pass international currency to each other. In this way, the public, corporations, and central banks turn one currency into another.

Key takeaways

✔ Forex trading takes place between two parties, directly.

✔ Three forms of forex markets exist: forward, spot, and future forex markets.

✔ The first currency listed in a forex pair is the base currency, while the second currency is called the quote currency.

✔ Central banks, news reports, market reactions, economic data, and credit ratings are some factors that drive price swings.

✔ Forex Trading operates by buying one currency simultaneously while selling another.

✔ Trading bots, computer programs using different indicators to detect patterns and execute trades automatically, have rapidly made their way into the market for crypto assets.

✔ A VPS can perform your transactions more efficiently than your computer because the transfer of orders is much quicker.

At some point, you might have traveled overseas, and chances are you have also made a forex transaction, but probably for practical purposes. This is a significant objective of foreign exchange. However, the vast majority of currency conversion in Forex is carried out to make a profit.

Most of today’s Forex trading is becoming increasingly computerized. It is an area that promotes and assists using bots to make automatic and smart trades. This post looks at the bot trading world and explains its forms and features.

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How Does Forex Work?

Unlike shares or stocks, forex trading does not take place on markets but directly between two parties in an over-the-counter (OTC) or off-exchange trading market. It means that all trades take place through computer networks between traders across the world rather than on one central exchange.

A multinational network of banks manages the forex market, distributed over four major forex trading centres in various time zones: London, New York, Sydney, and Tokyo. You can exchange forex 24/7 since there is no central location.

Instead of planning to take delivery of the currency itself, most traders make exchange rate forecasts to take advantage of price fluctuations in the market.

Forex trading

Different Forex Market Types

Three distinct forms of forex market exist:

  1. Forward forex market

A contract is agreed upon to purchase or sell at a predetermined price, a fixed sum of a currency, to be settled in the future or within several future dates at a fixed date. This is not a legally binding contract.

  1. Spot Forex market

This is the immediate exchange of a currency pair, which takes place within a specific period of time or at the definite point of trade settlement (on the spot.)

  1. Future forex market

A Futures contract is negotiated to purchase or sell a fixed sum of a currency at a specific price and date in the future. A futures contract, unlike forwards, is valid and binding.

What Is Base and Quote Currency?

A forex pair’s price is how much the quote currency is worth one unit of the base currency. The first currency mentioned in a forex pair is a base currency, while the second currency is called a quote currency. Forex trading often requires selling one currency to buy another, which is why it is quoted in pairs.

Forex trading and currencies

For each currency, there are three-letter codes that typically consist of two letters standing for the area and one standing for the currency itself. JPY/USD, for example, is a currency pair that involves the purchasing of the Japanese Yen and the selling of the US dollar.

Let’s look at an example: The base currency is JPY, and the quote currency is USD.  If JPY/USD is trading at 1.12101, then 1.12101 Dollars is worth one Yen. You can buy the pair if you assume that the base currency in a pair is likely to improve against the quote currency. If you assume that it is going to decline, you can sell the pair.

Forex trading is also heavily dependent on projections based on the countries’ economic, political, and industrial analysis.

What Forces Are Driving the Forex Market?

Forex, like most markets, is mainly driven by the forces of supply and demand. Therefore, it is crucial to gain an understanding of the factors driving price fluctuations.

  • Central Banks

Supply is regulated by countries’ central banks, which may announce steps that will have a direct impact on the price of their currency. Rising liquidity that injects more capital into an economy may cause the value of the currency to fall.

  • News Reports

Commercial banks and other investors tend to bring their money into strong-outlook economies. Therefore, if a good piece of news comes for the markets of a certain country, it will stimulate investment and raise demand for the currency of that region.

The reverse is also true. A piece of bad news will reduce the price of a currency by inhibiting investment. This is why currencies appear to reflect the reported economic health of the region they represent.

  • Market Responses

The reaction of a market to the news can play a significant role in driving currency prices as well. If traders think a currency is moving in a certain direction, they will trade accordingly. They will also encourage others to follow the increasing or decreasing demands.

  • Economic Data

Economic data is an integral part of currency price movements. It demonstrates how an economy performs and provides insight into what might be done next by the central bank.

  • Credit Ratings

The credit rating of a country is an objective measure of its probability of paying back its debts. A country with a higher credit rating is seen as a safer investment region than one with a lower credit rating.

When credit ratings are upgraded and downgraded, the markets shift as well. A country with an improved credit rating will see a rise in the value of its currency, and vice versa.

Investors generally try to maximize the return they can get from a business, while minimizing their risk. So, alongside interest rates and economic data, when determining where to invest, they may also look at credit ratings.

What Is Forex Trading and How Does it Work?

Forex trading, also referred to as foreign exchange or FX trading, can be defined as a network of buyers and sellers who, at an agreed price, trade currencies among themselves. It is how one currency is exchanged into another by individuals, businesses, and central banks.

Forex trading platform

Forex Trading operates by acquiring one currency simultaneously while selling another. A lot of forex transactions have historically been made through a forex broker. But with the rise of online trading, using instruments like Contract for Difference (CFD) trading, you can obtain details on forex price movements.

Forex Lots

Currencies are exchanged in “lots,” the currency sets that are used to standardize Forex trades. Lots tend to vary widely, as Forex continues to move in smaller quantities. A sum of 100,000 units of the base currency is a regular lot. Since individual traders do not necessarily have to place $100,000 (for instance) on any transaction, almost all Forex trading is leveraged.

Margin in Forex

Margin is the term used to describe the initial deposit that you put in to open up a leveraged position and maintain it. Note that your margin requirement will vary depending on your broker, and how big your trade size is when you trade forex with margin.

Margin is commonly expressed as a proportion of the complete position. For example, a trade on EUR/GBP might require only 1 per cent of the total value of the position to be charged to open it. So, you’d only need to deposit AUD 1000 instead of depositing AUD 100,000.

Pip in Forex

In a forex pair, pips are the units used to measure movement. A forex pip is generally equal to a one-digit movement in the fourth decimal position of a currency pair.

If GBP/USD moves from 1.35361 to 1.35371, then it has moved a single pip. The decimal places displayed after the pip are called fractional pips, or sometimes pipettes.

Bot Trading

Trading bots are computer programs that identify patterns and automatically conduct trades by using different indicators. Trading bots first appeared in the foreign exchange trading environment for private investors and soon found their way into the crypto asset market.

Forex Trading Robots

Forex bots are automated software programs that generate signals of trading. Using the MQL scripting language, most of these robots are designed to work with MetaTrader, enabling traders to produce trading signals or position orders and manage trades.

Risks

There are automated forex trading robots available for purchase over the Internet, but traders should be cautious when purchasing any such trading system. You are taking a risk if you are send your money to a third party, whether it is a fund manager or trading software.

If a trading bot is just a few years old and is used in an immature illiquid market, the risks are much more significant. Besides, the added risks of potentially unstable software, heavy losses due to flash crashes, and falling victim to a scam are also possible.

  • Faulty Software

If you select a poorly coded trading bot with subpar or even faulty software, you will possibly end up losing money using the bot. You can also only pick Bitcoin trading bots with the best reputations that provide the type of trading tools you need.

  • Flash Crashes

Trading bots can lead to massive losses in seconds in the event of a flash crash if users have not set stop-loss limits on their trades. In the increasingly illiquid and still largely unregulated world of cryptocurrencies, flash crashes occur quite often. This poses a risk to those who let trading bots automatically execute trades for them.

  • Scams

Often, before vanishing a few weeks later, businesses would pop up overnight to sell trading systems with a money-back guarantee. As the most likely outcome for a trade, they may cherry-pick profitable trades or use curve-fitting to produce outstanding results, while backtesting a system. Still, they are not valid risk and opportunity evaluation systems.

  • The Long Run Ineffectiveness

Another critique of forex trading robots is that they deliver gains in the short term, but their long-term output is mixed. This is largely because they are automated to move and follow patterns within a specific range. As a consequence, in the long run, a sudden price movement will wipe out profits made.

Cryptocurrency Trading Bots

Dozens of bots dealing in cryptocurrencies are currently for offer. They range from free applications for experienced crypto traders that anybody can use, to pricey subscription-based bots for experienced crypto traders. Even the most common cryptocurrency trading bots, however, differ in consistency, usability, and profitability.

How Does VPS Help Forex Trading?

A VPS (virtual private server) is a virtually made server hosted on a physical server along with many other private virtual servers. A VPS can perform your transactions more efficiently than your computer because orders are much quicker.

The effect is that you experience less slippage and less delay. As we all know, slippage costs money, sometimes a lot of money. So, this is a perfect way to decrease your losses and unpredictability. You can also open and close trades much quicker than would otherwise be possible by using a VPS close to the location of your broker’s servers.

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Summary

Forex trading is done directly between two parties. There are three distinct types of forex market: forward, spot, and future forex market. The first currency specified in a forex pair is a base currency, while the second currency is called a quote currency.

Central banks, news reports, market reactions, economic data, and credit ratings are the factors that drive price fluctuations. Forex Trading operates by acquiring one currency simultaneously while selling another.

Trading bots are computer programs that use different indicators to detect patterns and execute trades automatically.

A VPS can perform your transactions more efficiently than your computer because transfers and orders are done much quicker.

Sources: Foreign Exchange Market at Wikipedia, Forex Trading: A Beginner’s Guide – Investopedia

Learn More

What’s a Forex VPS? How does a VPS help a Forex trader? Where are the best places to get a Forex VPS? In our next post, read more about all these subjects: What is Forex VPS?  How does VPS support Forex traders?

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