What Is Forex Trading?
Every day, foreign currencies rise and fall in value to one another. Most traders make profits from such movements. Although lucrative, it also carries significant risks. The foreign exchange market runs 24 hours daily, making it quite a liquid market. Surprisingly, the forex market is huge, making it the largest financial market in the entire world. The average trading volume is $6.6 trillion daily, much more than any other market. Read More
Foreign exchange is exchanging a particular currency for another for various reasons such as commerce, trading and tourism. However, trading currencies is risky and complicated. Large trade flows within the forex market make it difficult for traders to influence the currency price. Thus, traders should take some time to learn and research the forex market and then look for a reliable ecn broker to sign up with. It is also vital to check what kind of protection provisions are available to deal with any market crisis or if the broker becomes insolvent. This helps bring transparency in the forex market for traders’ security and safety.
An Overview Of The Forex Market
The forex market is where the currencies are actually traded. It is the only non-stop trading market available in the entire world. Previously, the forex market was dominated by numerous institutional investors and large banks, who acted on behalf of their clients. But the market has become very much retail-oriented in recent years, where traders have started participating actively.
An interesting aspect of the forex market is that there are no physical buildings where trading happens. Rather, it’s a series of connections made via trading terminals and networks. The forex market has numerous participants, such as institutions, commercial banks, and traders.
How Does Forex Trading Work?
Forex trading is similar to buying and selling any other securities, such as stock. However, the main difference between forex and stock trading is that forex trading is always done in pairs, such as EUR/USD and JPY/GBP. Whenever you make a trade in the forex market, you sell one currency and buy another. The profit you make will be based on how the currency moves up against the currency you sell. For Example, let’s assume that the exchange rate between Euro and USD is 1:40 to 1. Thus, if you purchase 1000 euros, you would need to pay $1400 USD. Furthermore, if the currency rate moves from 1.50 to 1, you would be able to sell those Euros for $1500, thereby letting you generate a profit of $100.
Effects Of Leverage
Leverage is a common phenomenon used in the forex market. It allows traders to open a significant position using capital, which is in multiples of their initial capital. For Example, several forex traders employ leverage of 30:1, meaning they can buy $30,000 of currencies for just $1,000. You might be wondering what about the remaining $29,000? Well, the brokerage firm will lend you this remaining amount. This is what leverage is.
You can find several forex brokers or best regulated brokers in the market up to 500:1. Just like any other investment market, leverage can amplify both your profits and losses in the forex market. For Example, if you purchase $20,000 worth of currency and it moves up to 10%, you receive a profit of $2000. However, using the leverage ratio of 20:1 could bring you a 200% gain with a mere $1000 investment. However, it’s worth mentioning that leverage works both ways. Taking the above Example forward, let’s assume that rather than currency moving up, it dropped by 10%. This would not only mean you lose your initial capital of $1000, but also you would be required to pay off the loan to the broker.
Those interested in using leverage in forex trading must make sure they have an appropriate risk management strategy in place for minimizing losses. If you are a beginner, use low leverage at first and gradually increase it as you gain more experience.
How Do I Get Started With Forex Trading?
Before you start trading to forex, you must educate yourself about the forex market’s operations and one thing you need to know about forex brokers specialising for better results and analysis. Next, you must develop a trading strategy based on your funds and risk tolerance capacity. Lastly, you are required to open a broker account. Thus, nowadays, it is so much easier to open and fund your forex trading account online and begin trading immediately.