Many new users wonder about how does forex trading work. The concept was developed for businesses and everyday people to trade currencies from around the world. Originally only banks and large corporations were allowed to trade currencies inside the forex markets. When the internet came into play over 20 years ago it allowed everyday people to use online brokers to make trades which has grown to what you see today.
If you ever visited a foreign country than you probably went to a currency exchange and exchanged your countries currency for the country you are in's currency. Then when you leave you usually trade back the countries currency for your currency. The exchange rate is different for each exchange of currency and fluctuates daily. How does forex trading work in this situation? This exchange rate is what is traded inside the forex market. People bet whether the exchange rate will rise or fall based on a wide variety of factors like the economic outlook, technical analysis, and more.
When you go to trade currency in the forex market you need to find a broker which is similar to the currency exchange you visit in another country. This is where your going to "bet" whether or not the currency pair you chose to trade will rise or fall.
Currencies such as the USD, Japanese Yen, Canadian Dollar, British Pound, Euro, Swiss Franc, Australian Dollar are known as the Majors. Other currencies are considered minors and exotics. The minors include countries in the majors not paired with the USD, for example JPY/CAD (Japanese Yen/ Canadian Dollar) would be considered a minor. Exotic currencies are the rest of the currencies like the Russian Ruble, Chinese Yen, Mexican Peso. Not all of the online brokers trade the exotic currencies. I would definitely recommend finding an online broker that includes the exotic currencies so you have a lot more opportunites to trade with. I think your trading is limited when you have brokers that only include the majors and minors. Most trading strategies will work with the exotic pairs just as well with the majors and minors.
A strong economy represents a strong currency. When a country has a good economic outlook this is a signal for forex traders to buy into the currency. When an economy is weak this is a signal for traders to sell. This is why many trade strategies exist that compare economies to one another along with other fundamental factors. When a trader reads news reports about one economy getting stronger and another getting weaker at around the same time due to interest rates, war, job prospects, or housing than a trader will buy the stronger currency or sell the weaker one.