Trading can be of many forms. There are many things with value that you can trade with other people. One of the most common and popular ones is a Forex, creating a large market for Forex trading. Foreign exchange trading is one of the most popular markets in the trading industry.
In this article, we'll talk about what's Forex trading and all the basic points you should know about it to help traders, especially beginners, in understanding this trading.
How Does It Work?
Forex trading is known in many other names, such as FX trading and currency trading. Forex trading is like any other kind of trading, focusing on the exchange and trade of currencies from all around the world. It is a market and network of buyers and sellers interested in exchanging currencies for a decided and agreed price.
It is also one of the most traded markets globally because not just individuals but businesses, institutions, and countries participate in it.
Forex trading aims to gain profit from the changes in the value of a currency relative to another currency. Traders can profit when they buy a currency for a specific price and sell it at a higher price, or by selling a currency first and buying that back at a lower price than when they sold it.
Currency Pairs
To better understand how Forex trading works, you need to understand what currency pairs are. In a Forex market, you always trade currencies in pairs. A currency pair is composed of a base currency and a reference or counter currency.
A base currency is the first currency in a quote, and the counter currency is the second. For a currency pair, there's always an associated market price, which represents how much the second currency costs to buy one unit of the first currency.
An example of a currency pair is when you exchange U.S. dollars for euros where there are two or a pair of currencies involved. Also, the values of a currency pair are always relative to one another.
Here are the major currency pairs that account for almost 75% of the Forex trading market:
● USD/JPY
● AUD/USD
● EUR/USD
● NZD/USD
● GBP/USD
● USD/CAD
● USD/CHF
Types of Forex Trading Strategies
There are many approaches you can perform to analyze and trade currencies. Two of them are fundamental and technical analysis.
Fundamental Analysis
In fundamental analysis, the difference between the economies of the two countries is considered. It also studies how this difference can affect the relative strength of each currency in the pair. Differences between economies include money supply, interest rates, and trade balances.
Technical Analysis
Technical analysis considers the price action of the currency pair. To identify profitable trading opportunities, price patterns, indicators and support, and resistance levels are used.
Types of Traders
Aside from these analyses, there are also several types of traders in Forex trading. There are day traders and swing traders.
Day Trader
A day trader is a trader that uses technical analysis in identifying trades they will hold for minutes to hours. They close all positions at the end of the day.
Swing Trader
On the other hand, swing traders hold positions for several days and take advantage of significant price swings.
Pros and Risks of Forex Trading
Forex trading is one of the most popular activities nowadays, and more people are starting to invest and get involved. There are many reasons why they've shown interest and decided to indulge in Forex trading. It can't be denied that the market offers many benefits, which cause the online trading market to grow and expand. The main benefits include:
Low Volatility
There are fewer variables that affect the price difference of two currencies in the Forex market. It's also perceived to be more predictable compared to other assets like stocks, etc.
Decentralized System
The Forex market is founded on decentralization, and because of that, it's more accessible and therefore allows trading volumes to expand more and more.
Significant Liquidity
The Forex market is also the most liquid market globally, with a trading volume in excess of five trillion U.S. dollars. Due to this, you can open and close positions easier than in other less liquid markets.
Great Leverage
Volatility and leverage are closely related to each other. Since the Forex market has low volatility, the leverage when trading will always be higher.
However, since Forex trading and its market have many benefits and advantages for traders, it also poses some risks and disadvantages. Leverage and margin can indeed be used to gain more profit, but they can also multiply losses. Using leverage cautiously is a must, and traders must ensure that they know the potential losses on their trades. There also risks with counterparty and regulators.
Conclusion
Forex trading is a significant trading market. It has more advantages than disadvantages when trading since it involves real-money currencies all over the world. However, as traders, you must be cautious of all potential risks in the market to prevent significant losses.
