Forex Trading

Forex trading is also known as foreign exchange trading, currency trading or FX trading. With over $5 trillion traded on the market each day, the forex market has become the most liquid and dynamic market in the world.

What is forex?

Forex trading involves the conversion of one currency into another. A lot of foreign exchange is done for practical purposes, but the vast majority is undertaken in order to try and turn a profit.

Not only is forex the largest market in the world, it’s one of the most volatile.

Foreign exchange rates are determined by a de-centralised or over-the-counter market where currencies are traded. It’s open to both major institutions and individual investors alike.

What is forex trading and how does it work?

The forex market is a global currency trading market. It’s also sometimes called FX or FOREX. Here, one currency is exchanged for another in what’s known as a ‘currency pair’. There’s an exchange rate between each currency pair that fluctuates regularly.

Forex traders look to profit on fluctuating exchange rates, speculating on whether the price of one currency will go up or down against another.

Why Select Forex Trading?

There are many reasons why this market would appeal to both new and experienced traders, and just some of them include:

    • Accessibility, because with the power of leveraging you can trade large amounts of forex with just a small amount of capital;

    • Reliability, because with trading taking place on the largest market in the world there are fewer opportunities for individuals and institutions to manipulate prices;

    • Ease of trading, because with this being such a large market, liquidity is incredibly high;

    • Benefit from long and short trades, because it is possible to trade currencies without acquiring them;

    • Harness the power of technology, because trading platforms for forex allow you to trade almost instantly in a live environment;

  • Availability, because forex trading occurs on a worldwide market which offers the opportunity to trade 24 hours a day, five days a week.

As you can see, the forex market is highly attractive and potentially very lucrative for traders. Another advantage of this market is that the costs of individual trades are usually low, as they are built into the trades themselves.

Currency trading basics

Although stocks and shares are traded singularly, all currency trading must be done in pairs. When forex trading, you simultaneously buy one currency and sell another.

For example, the GBP/USD currency pair is sterling vs the dollar. The first currency in the pair (in this case GBP) is known as the base. This is the currency you think will go up or down in value against the second currency (in this case USD), which is known as the quote.

Currencies are often priced to the fifth decimal point. The smallest increment of any trade is known as a ‘pip’, which stands for percentage in point.

Can you make money buying and selling currency?

A forex investor can be an individual, a country or even a corporation. Anyone can trade forex online as long as they are astute enough and have enough financial capital.

The size of the market’s liquidity means that prices change rapidly, reacting to news and short-term events. This fluctuation creates opportunities for traders.

You can either take a long (buy) or short (sell) position depending on whether you think the currency’s value will go up or down. You would ‘buy’ a currency pair if you thought that the base currency would strengthen against the quote currency, or if you thought the quote currency would weaken against the base currency.

In contrast, you would sell a currency pair if you believed that the base currency would weaken against the quote currency. Or if you thought that the quote currency would strengthen against the base currency.

If you speculate incorrectly and the market moves against your position, you will make a loss.