What Is Forex Trading?

The global markets are filled with opportunities for trading; whether it is trading stocks, crypto trading, futures, commodities, bonds and more, the retail investor always finds a way to make the best out of their resources and improve asset allocation. One of the most popular, and least volatile, methods to do such investments is through Forex trading.

While the current forex trading structure was formed in the US around the 1970s, the practice of forex can date back as far as five centuries ago - with the first indications of its practice reported from Amsterdam, Netherlands.

So what is forex trading? In this article, we explain this concept of financial investment along with the best practices and most used terminologies in the market that investors must be aware of.

What Is Forex?

Forex, also called FX or FOREX, stands for Foreign Exchange Trading. It is a type of traditional financial market in which it is possible to carry out currency operations at an exchange rate, traded in pairs, anywhere in the world. Through the online Forex market, millions of daily financial transactions are carried out in real-time and in different types of currencies - the main operations being through the American Dollar (USD), Euro (EUR), Pound Sterling (GPB) and Japanese Yen (JPY).

Ever more popular due to a mixture of worldwide financial inclusion and digital literacy, the Forex is consistently attracting new investors looking to make profits. One of the key advantages that this market offers is the ability to trade for 24 hours on business days, where the investor may choose the most convenient time zone according to their capacity or currency persuasion. Other main advantages include the low cost of the transaction and the possibility of reinvesting the profit in real-time, greatly maximizing efficiency and the profit potential during trading hours.

Despite Forex trading seeming simple at first glance, since it only deals with fiat currencies like USD and EUR, it is actually quite complicated. While the crypto market, stock market, commodities, bonds and real estate all deal with their fair share of macroeconomic influences, forex trading is macro itself - it deals in countries and their resources, international relations, internal politics, conflicts and much more. Therefore, it is important to learn the process of forex trading quite well before getting started in the market.

How to Learn Forex Trading

The principles of learning forex trading are the same as learning cryptocurrency trading: to find your niche, properly research, focus on small amounts of resources or even demo accounts to test and learn from mistakes. When it comes to fundamental analysis, forex traders must have ample knowledge of global economies and international commerce, while on the technical analysis side the methods apply the same way regardless of target markets.

In addition, it is necessary to research which are the regulated brokers and the software available for transactions in your country or territory, such as the MT4 and MT5 platforms, the most used in the market. Through these basic steps, the trader will learn to make the right decisions and identify opportunities for long-term forex trading success.

It’s also essential to look for online forex trading platforms that offer novice traders a number of benefits, such as a welcome bonus, excellent educational material and the possibility to open a demo account where you can train your investment strategies without using real money.

Uses for Forex Trading

There are several uses for forex trading, which depend on the strategy or goal of each investor. Below are some of them:

• Speculation: Forex traders can speculate on the direction of currency exchange rates, betting that a currency’s value will either appreciate or depreciate.

• Risk management (Hedging): Companies that operate internationally often need to use forex trading to hedge their currency risk. For example, instead of risking the possibility that the exchange rate could shift against them, a company that expects to receive a payment in a foreign currency in the future may engage in a forex trade to lock in a rate beforehand.

• Arbitrage: Forex traders may attempt to take advantage of differences in exchange rates between markets by buying a currency in one market and selling it in another.

• Diversification: Investors with concentrated portfolios may benefit from further diversification through forex trading.

When to Invest in Forex Trading?

There are several reasons why it may be opportune for investors to choose forex trading, but the main perks come as follows:

• Low volatility compared to the stock and crypto markets.
• Open 24 hours during business days, across different time zones.
• Stable in its operability, with similar opportunities regardless of bullish or bearish global markets.
• Relevant for those looking for a deep understanding of macroeconomic influences.
• Platforms are quick and easy to use.

While the Forex market offers traders the advantage of trading in virtually all time zones, most movement takes place at the beginning of sessions on Stock Exchanges such as New York and London. Therefore, it is necessary to be aware of the opening and closing times of the sessions and the influence of the country’s economy - this will determine the volatility of currencies and the best time of day to carry out trades with greater success.

Pros and Cons of Forex Trading

Forex Trading is a high-risk, complex activity that is not suitable for all investors, but it can offer the potential for high returns if done well. Below we see some positive and other negative aspects of this financial activity.

Pros

• High liquidity: The forex market is the largest financial market in the world, with an average daily trading volume of over $6 trillion.

• Leverage: Forex brokers often offer leverage, which allows traders to trade with more money than they have in their account.

• Low barriers to entry: It is relatively easy to start forex trading, as it requires a small initial capital and there are many online brokers to choose from. Therefore, it is easier to start trading forex compared to stocks.

Cons

• High risk: The value of currencies can fluctuate significantly, and investors could lose all of their invested capital.

• Brokerage fees: Forex brokers charge fees for their services, which can eat into traders’ profits

• Leverage: While it may seem like only a positive aspect, it also has its downside. While leverage can amplify profits, it can also amplify losses. If a trade goes against a trader, the losses can be much larger than the initial investment.

An awareness of economic fundamentals and indicators is necessary for this kind of trading. To comprehend the fundamentals that influence currency values, a currency trader needs to have a broad understanding of the economies of the various nations and how they are interconnected.

Forex Trading Terminology

Like the many different terminologies and verticals present in the cryptocurrency market, Forex trading is also full of its own terms that investors must be aware of when conducting their research and trading in the forex market. While the list is plentiful for even other articles, here are the key forex concepts that traders must know.

• Bid is the price someone an exchange broker or market maker is willing to offer for a particular asset.
• Ask is the price a market maker is willing to sell an asset for.
• Pip is the lowest denominator in which a currency is priced.
• Trading is the act of trading stocks, currencies or commodities operated on different stock exchanges around the world.
• Spread describes the difference between the buy and sell price of the financial asset.
• Scalping is a trading technique that offers the trader the possibility to sell and buy assets through quick transactions and in a short period of time.
• Swap represents the asset’s interest rate charged after each session and determines the open position for the next transaction date - that is, the next business day. The trader has the possibility to use it to finance the purchase of another currency.
• Day trades, or day trading, are negotiations that happen within the same day.
• Exchange rate in forex is the price of one currency against another.
• Base is the first currency in a currency pair, so EUR in the case of EUR/USD.
• Quote is the second currency in a currency pair, so USD in the case of EUR/USD.
• Leverage allows traders to trade with larger exposure by borrowing funds from the exchange to increase their chances of profit - while also increasing the size of their loss, in case of a downside trade.

Conclusion

Forex trading is one of the best trading methods available in the traditional financial market. Whether you are an advanced trader or a beginner in the field, forex can offer many advantages to diversifying your trading portfolio in a low-volatility, fast and immensely interesting environment. As long as you do your own research, practice intensely before taking large positions and stay up to date in macroeconomic scenarios, Forex trading can definitely be the right market for you.

Author: Victor B Translator: yuanyuan
Reviewer(s) : Matheus , Ashley , Edward
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