What is Forex?
Forex (FX) refers to the foreign exchange market in which all the worlds currencies are traded in a decentralized market. It is the largest and most liquid trading market in the world, with over $4 trillion dollars traded daily; 24 hrs a day, 5 days a week. The market can stay open 24 hrs a day due to the decentralized marketplace which includes cities from all over the world with different time zones. So, when one trading day ends, another is just beginning on the opposite side of the world.
The extent of this market is directly related to the need for exchanging currencies. For example, when international businesses do business with each other, such as the purchasing and trading of goods, the importers must exchange the currency being paid to their local currency. As well, anyone travelling to another country needs to exchange their currency for local currency too. You see, currencies are constantly being exchanged, even outside of online trading exchanges.
Although the forex market is essential to individuals and businesses, it is especially important to financial institutions, central banks, and governments. Forex enables countries to participate in international trade and allows for large investments between nations for their goods and services.
How to Trade Forex
As mentioned above, forex trading is conducted all around the world and individual traders and investors can participate in this highly lucrative and liquid market. Traders wishing to participate in this market must first sign up to an online trading brokerage offering the trading of forex. Traders must be sure the online trading brokerage is trustworthy and competent, as there are many scams and fraudulent online forex brokers out there.
To a beginner, forex trading might seem quite complicated. However, it is actually very simple and easy to understand. To simply explain, the trading of forex involves the buying of one currency, while at the same time selling another currency. Therefore, forex currencies are always quoted in pairs, with the most commonly traded currency pairs being; EUR/USD, USD/JPY, GBP/USD, and AUD/USD. The goal is to profit from trading currencies by actively speculating on whether the price of a currency will increase or decrease in value. Various factors such as economics and geopolitics influence how exchange rates fluctuate. So, currencies rise and fall against each other. Therefore, by forecasting the direction currencies are likely to take, you have the opportunity to make profit.
So, let’s think of it like this- You might decide to buy the EUR, and sell the USD, anticipating that the Euro will rise versus the Dollar. You then buy a number of units of Euros for your Dollars, and your forecast proves correct. If that’s so, the Euro does rise, you close your trade and make a profit. Remember though, if your forecast is wrong and the Euro falls against the dollar, you will lose money.
Benefits of Forex Trading
Trading Forex presents numerous benefits to traders. See below, a list of the most notable benefits of trading forex.
Stable & Liquid Market
The forex market is massive and highly liquid. This high liquidity provides ample opportunity for forex traders to benefit from the market without disrupting it. This provides a healthy and stable market for traders to execute their trades quickly and at their desirable price.
24 Hour Trading
Traders can take advantage of peak trading hours when multiple big exchanges are open. During these hours market spreads are minimal and the volatility is increased.
In forex, the cost of a transaction is built into the price. This is known as the spread, which is calculated based on the difference between the buying and selling price. The spread in forex trading is generally quite low due to the high liquidity of the market.
Trade with Leverage
Traders can trade more money on the market than what’s actually in their account. For example, if you trade 50:1, you’re trading $50 for every $1 that’s in your account. In other words, you can control a trade of $50,000 using just $1000 of capital. This provides the potential to make a large amount of gains compared to your account balance. Although the opposite can be said too, you could lose a substantial amount as well.
No Directional Trading
Traders can benefit from both rising and falling prices in the markets. So, if a trader anticipates the price will go up, they can buy it, and go long. On the contrary, if they believe the price will decrease, they can sell it, or go short.