Forex (FX) trading is simply the conversion of one currency into another. The difference in conversion rates from this transaction is the profit that you stand to make. FX, or foreign exchange trading as it is sometimes known, is an increasingly popular market as you don’t need to have a great deal of capital beforehand. The fluctuating demand for certain currencies will push the value up or down, so it’s best to keep an eye on the conversion rates if you’re keen to get involved in Forex Trading.
Forex trading is one of the most actively trading markets on offer right now, with individual and company traders carrying out up to $6.6 trillion worth of transaction each day! The Forex market is also one of the largest liquidated markets in the world right now. As one of the easiest forms of trading to get yourself involved in right now, there are just a few things that you’ll want to be mindful of. Read on to find out more.
Before you jump in with both feet, there are a few terms you will want to familiarise yourself with. The base currency is what you are trying to buy or sell, whereas the quote currency is the amount that you should expect to pay or receive when making the trade. The base currency alongside the quote currency make up the currency pairing. The base’s value will then be shown in terms of the quote currency. You may also come across major currency pairs which are the most frequently traded pairings on the market, usually including the U.S Dollar.
When trading in the Forex market, you are trading a currency pairing, with no central exchange. The trade is conducted bilaterally between all market participants over the counter. The market price will tell you how much of one currency is needed to go on and purchase another. Each currency will have its own corresponding code, making it easier to identify each part of a pair. For example, Pound Sterling is “GBP” and the US dollar is “USD”, and so on.
If you opt to buy a currency pair, this indicates that you expect the price to rise, which will strengthen the base currency relative to the quote currency. Whereas if you find yourself trying to sell a currency pair, then that means that you expect a fall in price, suggesting a weakening of the base currency against the quote.
With trading one currency for another, you have to expect a certain level of constant fluctuation between the value of each national currency. National and global events can be the cause of such instabilities in the market, such as elections, a rise in unemployment rates and, of course, the current Coronavirus pandemic. Stay one step ahead of the rest by following an economic calendar which will go on to make connections between global events and trading markets for you, giving you one less variable to worry about.
The Forex market operates globally, therefore it’s active 24 hours a day – from midnight Sunday to the same time on a Friday night. Because of this, any changes in the market can be monitored and reacted to with higher efficiency, which increases the window of opportunity for trading.
Due to being the most liquidated market, the sheer volume of money that’s traded at any one time is so high that there’s a bigger potential to make a significant gain on your capital, whilst further increasing the volatility of the market.
The ability to trade using leverage is also a big asset to Forex trading, as this means that the entry cost for a transaction will be much lower than in other markets. As a result, you’ll only be depositing enough money to cover any potential losses, controlling the level of risk involved in your trade will be a lot easier.