‘What is Forex Trading?’ has become a widespread question. Each month, the word ‘Forex’ has been searched more than 100,000 times because there are a lot of Forex-related scams, which is used to pretend on behalf of the Forex market in order to raise funds and scam it as an investment in the foreign exchange market.
This article will provide you with an overview and information about Forex trading from the point that ‘what is Forex trading’, or ‘what Forex can be used for’ until everyone is probably curious about how to trade Forex in detail.
What Forex market refer to?
Forex, also known as ‘Foreign Exchange Market’ or FX trading, is the global over-the-counter (OTC) market where traders, investors, institutions, and banks will exchange, speculate, buy and sell world currencies based on demand and supply.
How do the currency market work
Forex is one of the largest trading markets with an estimated daily turnover of over US$5 trillion worldwide. Forex Trading will be made in ‘Interbank Market’, an online platform where the currency is traded 24 hours a day and five days a week (except Saturday and Sunday). All Forex trading is expressed in currency pairs. For example, EUR/USD = 1.105965 means that 1 Euro is equal to 1.105965 US Dollars. Buying EUR/USD means buying EUR and selling USD. On the other hand, selling EUR/USD means buying USD and selling EUR.
Here are examples of trading in the major currency pairs:
- EUR/USD
- USD/JPY
- GBP/USD
- USD/CAD
- USD/CHF
- AUD/USD
- NZD/USD
Common ways to trade Forex
- The spot market: what this market does is exchange currency pairs and real-time rates that come from supply and demand.
- The forward market: traders can join in a private binding contract with other traders, and secure future exchange rates.
- The futures market: this way of trading allows you to
pick what you want to buy or sell in a standardized contract, and you can get at a particular rate.
Interesting terms for Forex
- Bid-ask spread
Since exchange rates are defined by the highest amount, which is based on a currency payment of buyers. Plus, it includes the lowest amount of seller requirements. Hence, Bid-ask spread can be considered as the value trades and the variation between these two amounts.
- Leverage
If traders don’t want to spend a large amount of money while trading, the term ‘leverage’ is something that lets them borrow money.
- Margin
When traders decide to borrow the money, it has a price to pay because they need to provide some money as a deposit. This is called a margin.
- Currency pair
For anyone who engages in the forex market, a currency pair is necessary. It is a national currency from two different countries that are used when trading.
- Pip
It’s the smallest potential price change of a currency pair. For example, a pip is 0.0001 relating to 4 decimal places of forex prices.
- Lot
A standardized unit of currency or ‘lot’ is the thing that trades Forex.
Some risks may happen when applying Forex Trading
Due to the requirement of leverage and margin, traders can encounter ongoing fluctuations in currency prices. However, it’s not a massive amount.
Moreover, when the fall in value is getting bad, and traders struggle with margin calls, they may not be able to do anything else but to sell their securities. Despite that, trading and transaction costs can arise, and they probably get worth profits.
What Forex can be used for?
- Forex Hedging
When running a business in other countries, the owners have to confront rapid changes in currency values. Forex Exchange Market will help by hedging currency risk and fixing the rate at which the transaction is completed. Plus, traders can buy or change markets in advance that are locked in at the same rate. For example, the U.S. company sells the product in Europe and earns €200, but if exchanged back to dollars, they’ll get back $160. Hence, to prevent something like this, the company can decrease the risk by short-selling euros and buying dollars at parity. It could help owners to prevent more losses of their profit when running a business overseas.
- Speculation
There are many factors that affect the demand and supply of the currencies, for example, interest, economic situation, tourism, etc. So, speculation can be considered from those factors that what currency will strengthen, and what currency will weaken because the currencies must be traded in pairs.
The highs and lows of Forex trading
Highs
- The Forex Market has the largest daily trading volume in the world. It’s traded 24 hours a day and 5 and a half days a week.
- The great use of leverage allows you to start with a little capital and multiply the profits. Plus, forex trading uses the same rules as another regular trading. However, it’s easier to trade forex than stock.
- The forex market is quite decentralized, so there is no manipulation from the company or stock like others trading.
Lows
- Even though the forex may sound great for the beginner, it’s much more volatile than others.
- Forex trading allows you to use a little capital and offer a great use of leverage. However, the traders must be careful and read the terms and policies thoroughly.
- Forex trading is about currencies, so the traders must understand the fundamentals of economics. They have to get the overall picture of the economy in order to grasp the factors that drive currency values.
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