Forex – also known as the foreign exchange market – is the largest trading market in the world. At the beginning of a trading career, many aspiring traders will have trouble wrapping their minds around how trading Forex works, or if it works at all. Basically, the Forex market is where banks, businesses, governments, investors, and traders come to exchange and speculate on currencies. Its objective is to exchange one currency for another, with the expectation that the price will change in your favor. Forex is a decentralized market: this means that there is no central location and there are no formal exchanges where transactions take place. Forex trading happens mainly electronically by telephone, internet, or in person. Being a global market, the FX market is accessible 24 hours a day. The markets are available 5 days a week and are closed from Friday to Sunday.
Forex trading operates on a simple principle – traders independently choose currency pairs to engage in trading.
Each currency pair has a ‘base’, which is the first denoted currency, and a ‘counter’, which is the second denoted currency. Each currency could strengthen (appreciate) or weaken (depreciate). As there are two currencies in each pair, there are essentially four variables you are speculating on when it comes to forex trading. One currency acts as a commodity, and the other is considered a means of payment.
The main task of a market participant is to buy cheap and sell more expensively. Currency exchange rates are fluctuating all the time for a variety of factors, such as the strength of a country’s economy. What forex traders seek to do is profit from these fluctuations by speculating whether prices will rise or fall.
Traders in the foreign exchange market (forex) rely on the two basic forms of analysis used in the stock market: fundamental analysis and technical analysis.
Fundamental analysis requires learning the macroeconomics of a country and establishing the impact this has on the value of its currency. While Technical analysis is a prediction of future price changes based on the analysis of price changes in the past. Forex is the largest market in the world, with daily volumes exceeding $3 trillion per day. This means dense liquidity which makes it easy to get in and out of positions. Much like anything in the investing market, learning about currency trading is easy but finding the winning trading strategies takes a lot of practice.
If you get a good head start, you can earn a lot of money. You learn a lot about economics by trading with currencies and you can also get a good network from forex trading. However, despite many traders entering the market, most traders also exit the market as quickly as they started due to losses and setbacks. When doing Forex trading, there’s always a risk of losing or earning money. Unless you really do the work and create strategies and systems that work for you.
