Forex Trading for Beginners
The foreign exchange market or forex (FX), is one of the biggest most liquid markets in the world. It is fundamentally the buying and selling of national currencies traded against each other. The daily volume of trading on the market is over $5 trillion. Forex market participants include banks, businesses, and investors.
When trading on the FX market, you are trading a currency pair. This is not conducted on any central exchange. Instead, it is done bilaterally between market participants over the counter (OTC). These forex transactions are facilitated mainly through different forms of trading such as a contract for difference (CFD) trading.
This article will benefit all levels of traders, giving you a solid foundation of knowledge to build on. Read on to find out more about this lucrative market and how it works.
Basics of Forex trading
The price of national currencies is affected by the volume of participants in the market, buying and selling currency pairs. The value of the first currency in a pair (base currency) is shown in terms of the other currency (quote currency). The base currency is what you are buying or selling and the quote currency is how much you will pay or receive.
There are major currency pairs, which are the pairs that are traded the most often and typically paired with the U.S. dollar (USD). Other currency pairs are called Minor or Emerging/Exotic currency pairs.
How it Works
When trading forex, you trade one currency for another. There are constant fluctuations in the value of national currencies. These can be affected by a number of reasons like broad macro-economic events such as the election of a president, or events specific to a country such as an increase in inflation or unemployment.
Top traders stay up to date with world events and track any changes that may occur in the forex market. They will buy when a currency’s value is low and sell when it is high. Many use economic calendars to explore key global events that could potentially make subtle or significant changes to the financial markets.
Benefits of Forex Trading
You can trade using leverage. This means that the entry cost for a trade is much lower when compared to other markets. By only depositing enough money to cover possible losses, you are able to control your risk better whilst still able to make bigger returns relative to the original amount invested, making it a more efficient way of using your capital.
The global nature of the market means that it is active 24 hours a day from Sunday night through to Friday night. This is beneficial because, other than the weekend, any changes that may occur in the market can be monitored and reacted to if necessary. It ultimately increases the window of opportunity for trading on the forex market.
The forex market is by far the most liquid market in the world. This means that the amount of money being traded at any one time on the market is extremely high, increasing the volatility of the market and the potential to make massive gains.