The foreign exchange (forex) market is where all the currencies in the world are traded. With the daily trading averaging over five trillion US Dollars, it is the world’s biggest, free-flowing market, making it an attractive investment opportunity for traders and investors like Ali Seytanpir.
Currency exchange is important because without it businesses wouldn’t be able to trade in foreign countries and tourists wouldn’t be able to spend their money abroad. Furthermore, it has become a popular way to trade. Therefore, to help individuals know whether trading in this market is for them, this article will explore what forex trading is, the benefits and the risks.
What is Forex Trading?
Forex trading is where people participate in the forex market to make a profit. It is also referred to as currencies or foreign exchange trading, or FX trading.
The exchange rates’ fluctuation between two currencies is where traders and investors can make a profit. This involves guessing whether the value of one currency will increase or decrease in relation to another currency. See the attached infographic for more facts about the forex market.
How Forex Trading Works
Forex trading involves two currencies being bought and sold simultaneously. The two currencies are referred to as ‘currency pairs’, and one currency is the base (the currency that will increase or decrease) while the other currency is the quote. Watch the embedded video to learn more about the different types of currency pairs.
EUR/USD, which stands for Euro/US Dollar, is an example of a currency pair and is one of the forex market’s most common pairs. While taking part in the forex trading, investors and traders can make informed guesses about which way the market is going and when they do, they can decide whether to buy (long) or sell (short) currency.
Who Trades Forex?
The following individuals and organisations trade on the forex market:
- Central Banks – To try to stabilise the market, a country’s central bank uses its foreign exchange reserves.
- Banks – They participate in the forex market for their own account or for their customers.
- Companies – They need to take part in the market, so they can buy from and sell to foreign countries.
- Retail Forex Traders – The retail trading industry grows daily thanks to traders being able to access the forex market online.
- Individuals – People who travel to different countries will need to exchange their money into the destination country’s currency.
- Investors – Investors with a portfolio of clients use the forex market to make foreign security transactions easier.
- Hedge Funds – Every day they use billions of dollars of equity in the forex market.
See the attached PDF to learn the skills required to be a successful forex trader.
Forex Trading Benefits and Risks
Even though traders can profit from forex trading it comes with potential risks, so an individual needs to consider both the advantages and disadvantages before deciding to take part.
Here are some advantages:
- It’s a global 24-hour market, so as long as the market is open it is continuous.
- Liquidity is high.
- There are low transaction costs.
- Leverage can be used.
- A profit can be made from both falling and rising prices.
Here are some risks:
- High leverage means losses can also be high.
- Rising and falling interest rates can affect currency exchange rates, so forex prices can change dramatically.
- Exchange rates can change before trades have been settled.
- A country’s stability and structure can have a great effect on the forex prices.
While the forex market is a great market to trade, there are risks that shouldn’t be ignored. However, with careful consideration, this can be an ideal starting point for new investors and traders.