What is Forex Trading?
The foreign exchange market – also known as the currency market, FX or simply Forex – is the decentralised market where all of the world’s currencies are traded. Not only is it the largest market in the world, but it is also the most liquid, with a daily trading volume of more than $5 trillion.
There’s no stock market that is anywhere near as large as the Forex market, so it’s inevitable that many of those wishing to get into market trading for the first time start out with Forex trading, which is the practice of buying one currency at the same time as selling another.
The Basics of a Forex Transaction
Even if you have never been involved in Forex trading, you will have previously made a Forex transaction if you have ever travelled abroad and needed to convert your local currency into another currency – for example, pounds into Euros.
As those who frequently need to convert currencies will know, the exchange rate between any two given currencies is liable to fluctuate continually, so that if a single pound was worth 1.18 Euros one day, it may only be worth 1.17 Euros the next day or have jumped back up to 1.20 Euros a week later. It is by speculating on these rises and falls in exchange rates that you can make money through Forex trading.
Buy and Sell Currency Based on Market Predictions
As with other forms of trading such as stocks, successful Forex trading is about accurately judging which way the markets will turn, and making your trading decisions accordingly. If you expect a currency to go up in value, you can buy it, whereas if you expect it to decrease in value, you may decide to sell it.
Forex prices are continually influenced by all manner of factors, including the prevailing economic and political conditions, monetary policy, currency intervention and natural disasters. You may read in the news, for example, that a certain country is devaluing its currency to attract a greater amount of foreign business. If you expect that trend to continue, you may opt to trade it against another currency, such as the US dollar.
How Has Forex Trading Become so Popular?
The Forex market is what is known as an “over-the-counter” or OTC market, which means that trading takes place via a network of dealers rather than on a centralised exchange. Unlike the majority of financial markets, the Forex market has no physical location or defined opening hours, with Forex trading instead taking place between businesses, banks and individuals around the world on a 24 hours a day basis, from Sunday evening through to Friday night.
Trading effectively opens on Monday morning in Wellington, New Zealand, continuing through to Tokyo and Singapore and then to London. Trading closes in New York on Friday evening. The 24-hour nature of Forex trading helps to minimise what is known as ‘price gapping’, whereby a price jumps from one level to the next without any trading in-between.
The Benefits of Leverage
There are various terms to which you will need to become accustomed if you are to understand this type of trading and devise the best Forex trading strategies, one of which is leverage. The leveraged or margined nature of foreign exchange means you can place a trade on this market while depositing only a small percentage of the full value of your position.
Forex trading effectively involves borrowing the first currency in a given currency ‘pair’ to buy or sell the second currency. The sheer depth of liquidity in this market means the big banks are happy to allow you to trade with leverage – so if you’re trading 300:1 leverage, to give just one example, you can trade £3,000 in the market while setting aside just £10 in margin in your trading account.
This reduces the amount of capital investment that you need to make, but also significantly increases your exposure. Remember that although leverage gives you the scope to make a lot more profit, the same applies to losses, which if you aren’t careful, could exceed your deposited funds. It’s therefore strongly advised that if you are new to Forex trading, you only opt for lower leverage ratios at first, so that you can get used to the market with the minimum of risk.
Discover the Best Forex Brokers With Us
To really get the most out of your Forex trading experience, it will inevitably help to choose the most suitable Forex broker. This is what we are committed to empowering you to do here at Top 10 Best Forex Trading, through the informed ratings and reviews that we provide in relation to well-known and obscure Forex trading portals alike.
Learn more about the leading Forex trading sites with Top 10 Best Forex Trading today!