Before we start talking about what is forex trading, we will make an easy explanation about what is the Forex Market.
What’s the Forex Market?
The Forex Market (or foreign exchange market) is the “place” where currencies are traded. FX market plays a vital role in the global economy, it is the world’s largest financial market. Every day trillions of dollars exchange from one currency to another.
What is Forex trading?
Currency exchange is essential for International Business and the Forex Market makes this happen. Forex market includes governments, businesses and, of course, investors. We proceed to explain what is Forex trading with three examples that we hope clarify it for you.
The government uses Forex Market to implement policies. For example, when conducting business with another country, whether it’s borrowing money, lending money or offering Aid. A country needs to convert its currency into another foreign currency business.
Businesses can participate in the Forex Market to facilitate international trade. Businesses require to the Forex Market to convert payments for goods and services bought overseas or to exchange payments from International customers into their preferred currency.
Advanced investors use the Forex Market to speculate on changes in currency prices. Currency prices change almost constantly during the week, because the Forex Market is open 24 hours a day, excluding weekends. During the week, it has to be open around the clock, because of the global nature of the economy.
How does Forex trading works?
In Forex trading currencies are always traded in pairs, which means the value of one currency is always stated relative to another currency. The two-sided nature of the pairs is a little confusing at first, but in practice it’s quite simple. Let’s look for a trading example, using the EUR/USD currency pair. Even though there are two currencies involved, the pair itself acts like a single entity, similar to a stock or commodity.
Let’s suppose an investor thinks the European economy is going to grow faster than in the United States, and as a result she thinks the Euro will strengthen against the US dollar. She can buy the EUR/USD pair to speculate, on her assumption she’ll make money conversely. If the pair raises, she’ll make money, conversely, if the pair falls she’ll experience a loss.
Investors buy and sell currency pairs using margin. The process of buying and selling Investments with margin is much different than buying or selling an investment like a stock. Margin borrows money used to purchase Securities in a margin account. The amount of margin you’ll need varies between currency pairs and the size of a trade.
Currency pairs typically trade in specific quantities known as Lots. There are several different lot sizes, but the two most common are standard and mini. The margin requirement for many lots is usually around $100, and standard lots are around $1,000. These margins seems like a small dollar amount, but it’s important to understand that the lots are highly leveraged.
Leverage means to use a small amount of money to control a very large amount of currency. Most Forex investors buy and sell currency pairs using leverage. In fact, leverage is a key feature of this Market. Leverage associated with currency pairs is one of the biggest benefits of the Forex Market, but it’s also one of the biggest risks gives investors the potential to make large profits or large losses. Leverage gives to the investors the potential to make large profits or large losses. It’s because investors using leverage can grow exponentially and spiral out of control, but if the investors manage risk and limit leverage, they could possibly capture the benefits of Forex investing. These benefits include the ability to trade 24 hours a day and capitalize on different market trends as said it before.
Forex trading can influence other asset classes
The Forex Market is, by far, the world’s largest financial Market, with trillions of dollars changing hands every day. The huge size of the Forex Market means it can influence other asset classes, such as stocks, bonds and commodities. For example, if the US dollar experience as a down Tech, it impacts Commodities, because they’re typically priced in US dollars. This raises the cost of goods and does inflationary. As a result interest rates may rise, causing bond prices to fall. All this can impact the stock market. As you can see, one change in the Forex Market can have a ripple effect across several markets. This is just one example of what is Forex trading and how can influence other asset classes.
The Forex market widespread influence may appeal to investors who are interested in global economics. These investors like learning about other countries, their currencies, how these pieces all fit together and how the global economy Works. Investors who are less interested in learning about connections between various Global Market, might consider a less risky method of Forex investing, such as currency exchange traded funds or ETFs. These funds can be a less risky way to invest in a currency and can potentially be an effective way to diversify your portfolio.
Now that you know what is Forex trading and you have a general idea of how it works, maybe you are interested in making profits in the FX market. If that so, you can check our Forex managed accounts services that will allow you to do it without risking your funds as a beginner.